Energy, Politics & Money - 12 June 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:
Goldman Sachs slowly but steadily coming down to earth, as it has once again lowered its crude oil price forecast, now to $86 per barrel by December 2023
The news that while Some 75 of the world's largest 112 fossil fuel companies have now committed to reaching net-zero, the scope of the ambition or the plans to deliver fall significantly short of what is required to actually get to net-zero
The “Mass Extinction Event” underway for startups, as the new monetary reality – higher interest rates and balance sheet reductions by central banks – has made capital from venture investors and banks scarce and expensive
A review of the US – China engagement (or lack thereof…) at the recent Shangri-La conference on security in Singapore, which proved a near complete breakdown in US – China relations, the very strong bonds between the US-led Northern countries (Europe, UK, Australia, Japan), and the widening gap between these Northern countries and the developing world on the subject of Russia and China
The weaknesses of both China and the US as they compete with each other, and how China is trying to leverage the US weakness, its need for partners, by driving a wedge between the US and Europe
China’s early achievement of a government target proposed in 2021, under which renewable capacity was to exceed fossil fuel capacity by 2025 – which was actually achieved by end-2022
The bottleneck for renewables advancement that is the power grid
The leading role Russia and China play in the nuclear segment of the energy industry globally
A review of the elements in the US debt ceiling deal that are designed to accelerate permitting for energy projects, which appear to fall short if the objective was to have a breakthrough impact
The 35% increase in the natural gas price in Europe last week, due to the first days of warmer weather on the continent – trader panic or a harbinger of things to come?
The rise of anti-establishment political parties across Europe, in particular the AfD in Germany, which in no small part is resulting from energy politics, including the decision to end the energy relation with Russia over the war in Ukraine which has driven inflation, and energy transition policies
General Energy News
By the close of business last Friday, the effect of the surprise Saudi Arabia 1 million barrels per day production cut had been essentially eliminated from oil prices, writes Bloomberg. By Friday at 5 p.m. in London, Brent futures were around $76 a barrel — almost exactly where they were a week earlier. Despite expectations that oil demand will outstrip supply in the coming months, several things are fueling the bears’ confidence. Two negatives really stand out: the first is that Russian shipments have boomed in the face of expectations that western sanctions would curtail them. The second is concern about the fate of China’s economy, for years the bedrock of demand growth.
Goldman Sachs, one of the most bullish banks on the outlook for oil, has once again lowered its price forecasts, writes Bloomberg. Much to the delight of EPM, as we have been saying for months that GS was selling you an unrealistic vision for the future. The bank has dropped its Brent forecast for December to $86 a barrel, down from its previous estimate of $95 a barrel. This was Goldman’s third downward revision in the last six months, after previously having a bullish $100-a-barrel prediction.
Some 75 of the world's largest 112 fossil fuel companies have now committed to reaching net-zero. That's up from just 51 a year ago, according to the assessment of publicly available data by Net Zero Tracker, run in part by the Britain-based Energy and Climate Intelligence Unit and the University of Oxford, writes Reuters. But most targets do not fully cover or lack transparency on Scope 3 emissions or don't include short-term reduction plans, Net Zero Tracker says. That makes them "largely meaningless", it said.
Macroeconomics
The Wall Street Journal writes that the new monetary reality – higher interest rates and a balance sheet reductions by central banks – is leaving a mark on the startup industry. Fresh capital from venture investors and bank loans is now scarce and expensive, rather than abundant, as a result of which a “Mass Extinction Event for startups is under way”, it says. The venture-capital boom in 2021, as well as pandemic-era government funding to small businesses, likely kept businesses alive for longer than they would have otherwise, some observers believe. Now that those funding sources have dried up, the failures are coming in.
Geopolitics
A review of the US – China engagement (or lack thereof…) at the recent Shangri-La conference on security in Singapore over at Project Syndicate notes that a robust bilateral dialogue between the two countries is almost non-existent at the ministerial level, with military-to-military contact even more limited. The article blames this dangerous state of affairs, because it allows for unintentional mistakes and misunderstandings to escalate into physical confrontation, on an unwillingness to engage” on China’s part. At EPM, we respectfully disagree with this assessment. If a country really wants to engage with another country, obviously it should start by not placing officials of that other country on sanctions lists for doing their job. (Chinese Defense Minister Li Shangfu is sanctioned for buying Russian weapons in 2018.) Beyond this, the article also notes the US-lead partnerships were on full display at the conference, as officials from the US, Europe, the United Kingdom, Japan, Australia, and Canada all sang from the same, choreographed and well-prepared song sheet on both Russia and China; while US-led trilateral meetings were held on the sidelines, a “new Quad” meeting of the US, Japan, Australia, and the Philippines took place, and senior defense officials from the Five Eyes intelligence alliance (the US, the UK, Australia, New Zealand, and Canada) held discussions. The article also notes, however, that the gap between the North and the South is widening. In many less-developed parts of Asia, the Russian and Chinese narrative of the war and its causes, including “provocation” by NATO, has gained considerable traction, as evidenced by Indonesia’s Ukraine peace proposal (which was based on a cessation of fighting at present positions), and India’s absence from the conference.
China needs to walk a fine balance in its relationship with the US, because the latter, as the dominant power in the Middle East, could direct U.S. military forces to block energy shipments to China in in the event of a conflict between China and the United States, writes Foreign Policy in Focus. Although the United States is less dependent on the region’s oil today than it has been in the past, U.S. officials insist that the Middle East remains strategically important. As long as other countries continue to depend on the region’s energy resources, U.S. officials believe that they can use the region to influence the development of these countries and perhaps even impede it, it says. Having fought several major wars in the region—in Afghanistan, in Iraq, against the Islamic State—the U.S. military has built an infrastructure that enables it to quickly surge U.S. forces into the area. EPM notes that in addition to military dominance over the ports of departure, the US also militarily controls the shipping lanes from the Middle East to China. From the Strait of Hormuz, through the Malacca Strait and beyond.
Meanwhile, the National Interest writes that the US too must tread cautiously, as it says the US can no longer impose its “leadership” on the world in the way it once did. Five major trends are driving the fundamental shift in global geopolitical realities, it argues. The first regards the West’s control over the overall narrative, which enabled it to portray itself as the originator of modern civilization and a benevolent guiding force, is now weakening. The second regards belief in the “rules based international order”. The concept is the subject of much derision around the world, it says, and is widely regarded as a tool used by the West to control global affairs and maintain hegemony. Third regards the idea that western military power is for “peacekeeping”, because it says more countries now see in particular the US expenditure on its military as a cause for instability. The fourth trend underway is the dethroning of the Western financial superstructure, which is the natural results of the US increasingly using its dominance in the world of finance to force its will upon countries. As a result, countries are looking at ways to de-dollarize and settle international trade in manners that do not give the US leverage. Fifth and finally, it says there is a notable collapse of the Western press’ credibility. In summary, therefore, it argues that if the US continues on its current path, it will eventually lose support of its partners – or its partners will lose support from their populations.
China is trying to leverage the US’s need for partners by driving a wedge between it and Europe, writes Asia Times. China’s number two official Li Qiang will visit Berlin and Paris later this month, attending a June 22 conference on support for poor countries (grandly titled “A new world financial pact”). The conference is the project of French President Macron. Europe needs China economically, not only as an export market, but also for imports of goods related to the energy transition, And, as Asia Times notes, to manage African migration into Europe. China’s invested an estimated US$155 billion in Africa during the last twenty years. If halted, this would greatly increase immigration from Africa to Europe.
Energy Transition & Technology News
China's non-fossil fuel energy sources, such as wind and solar power, account for 50.9% of the country's total installed capacity, marking the early completion of a government target proposed in 2021, under which renewable capacity was planned to exceed fossil fuel capacity by 2025, writes Reuters. However, inconsistent utilisation of the resources means that China's energy consumption mix remains weighted toward fossil fuels, principally coal. Coal accounted for 56.2% of total energy consumption last year, versus 25.9% from renewables which includes nuclear energy.
The Financial Times says a backlog is developing in connecting renewable energy sources to the grid, and that this is holding back the greening of electricity. Around the world, developers of renewable energy infrastructure are being told they must wait anything from a couple of years in parts of the US, to up to 15 years in the UK, before they can plug projects into grids.
As the debate on the role of nuclear in the energy transition continues, Nikkei Asia notes the outsized role Russia and China play in this segment of the energy industry. The two countries account for nearly 70% of reactors under construction or in planning worldwide, it says. There are 110 third-generation nuclear reactors under construction or planning. China accounts for the most, with 46, followed by Russia with 30. The two countries account for 69% of the total. Notably, 33 of the reactors are being constructed or planned outside each respective country. Russia has the largest number of overseas reactors with 19, and despite growing opposition from Europe and the U.S. following its invasion of Ukraine, it maintains a strong global influence in nuclear power. Russia is collaborating with Turkey and Egypt, for example, while China is collaborating with Pakistan – and trying to get the nuclear development contract that Saudi Arabia has first offered to the US, EPM notes. While Russia and China focus on conventional nuclear, the U.S., Japan and Europe are hoping to catch up using small modular reactors (SMRs).
Climate Politics
The US National Environmental Policy Act (NEPA), enacted in 1970, is considered by many a cause of energy projects delays – both conventional fossil projects and renewables. As part of the agreement on the US debt ceiling, NEPA will be reviewed and updated to enable accelerated energy project progress. The Conversation has looked the likely changes and what they mean for energy production. First, it notes that NEPA only applies to projects that involve the US federal government in one way or another, so not to private projects on private lands. One notable change agreed as part of the US debt deal is that henceforth a single lead agency and a single environmental impact statement will suffice for projects, even when those projects require multiple agency approvals. Also, environmental impact statements will be required to be completed within two years and be no more that 150 pages long for most projects, and 300 pages for the most complex projects. While meaningful, these changes alone will have not have a breakthrough impact, the authors argues, as the permitting hurdles outside of NEPA are also significant.
The Electrification of Transport
The Global Energy Crisis
The first days of warmer weather in Europe and immediately natural gas prices shoot up. On Friday, the benchmark contract ended the week 35% higher, writes Bloomberg. While high inventories and subdued industrial demand have depressed prices in recent months, traders are on edge about the possibility of tightening supplies, it says. There is anticipation of a heavy maintenance schedule for LNG export facilities this summer, which coupled with additional cooling demand in East Asia could very quickly create a scramble for supplies among major importers, Europe, China and Japan – with the latter two have more access to volumes on longer term contracts. In the EPM view this news highlights that fact that when it comes to energy, Europe continues to walk a tightrope. Not much is required for the continent to find itself in serious trouble. If all goes well – favorable weather and no supply disruptions – all will go well. But if just one element were to not go as well, things will go pretty bad pretty rapidly, we fear.
Politico notes that German officials are worrying over the recent rise in support for the right-wing Alternative fur Deutschland (AfD) political party. In the last three months support for the AfD has seen an uptick of 4 percentage points, now making it the third-strongest political force, only slightly behind Chancellor Olaf Scholz's Social Democrats at second and the center-right CDU/CSU main opposition bloc first. Two recent polls, by Insa and Infratest dimap, even put the AfD on par with Scholz's Social Democrats, at 19 and 18 percent respectively. Behind this development is German energy politics. The country’s green energy law that seeks ban new installations of gas and oil heating in buildings from 2024 is a cause of anger in the country, as is the impact of the country’s decision to cut its decades old energy relationship with Russia over the war in Ukraine, which has raised energy bills for businesses and househlds. Another factor of influence is Europe’s immigration policies. Politico notes that it is not only Germany where this form of political instability is on the rise. Immigration, energy policy and inflation (in part due to energy policy) are boosting anti-establishment parties across the continent. The far-right is also strong in Austria, where the Freedom Party of Austria is leading in polls at 27 percent; France, where the National Rally is second at 24 percent; and Sweden, where the Sweden Democrats are in third place at 18 percent. In Spain, which heads for national elections on July 23, the far-right Vox is third in polls, at 16 percent. And in Italy, the far right is already governing: Giorgia Meloni and her Brothers of Italy last October became the first far-right leaders in the Mediterranean country since World War II.
In another article, with the hilarious title “Watch out Ukraine, here comes the Hungaro-Austrian Empire”, Politico notes how pro-Russian politicians are on the rise in Austria and Slovakia. Driving their rise is a shared, anti-EU and anti-immigration narrative, that in the view of EPM is being supported by the worsening economic situation caused by inflation – which in no small part results from energy politics, as we mentioned above.