Energy, Politics & Money - 12 October 2022
Hard hitting and insightful independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, we look at harsh American words directed at Saudi Arabia over the recent OPEC+ decision - we explain why these should have no serious implications for global energy markets.
We look more closely at:
The backing for the US price cap plan by leading economists (where we explain why they are mistaken)
The implications of monetary tightening for the future of US Shale
The latest IMF downgrade of global economic growth in 2023
Hydroelectricity in Indonesia and a green hydrogen connection between Spain and The Netherlands
A flying car in Dubai
New priorities at the world’s largest investors, as a result of which Larry Finck and his counterparts will this year not attend the COP meeting
General Energy News
MORE US POSTURING ON OPEC+ CUTS
More verbal threats coming from the US over the recent OPEC+ quota cut. Reuters reports President Joe Biden pledged on Tuesday “there will be consequences” for US relations with Saudi Arabia, but would not discuss what options he was considering. At EPM we maintain our assessment that nothing of significance for global energy markets will result from this. We’ve seen this “verbal sparring resulting in nothing” too many times before, over too long a period.
In the midst of harsh American words, therefore, it is good to take a step back and look at the facts regarding the US – Saudi relation, and the value this relation brings to both parties, as David Flicking has done for Bloomberg. Because, the most potent weapon in modern warfare is energy, and control of the supply lines that get it from its sources to its consumers.
OIL CAP – RUSSIAN REVENUE THREATENED BUT NOT PRODUCTION
Meanwhile, 16 economists from top US and British universities told US treasury secretary Janet Yellen a price cap on Russian seaborne oil deliveries being developed by the United States and G7 countries could significantly reduce Russia's revenues while encouraging Moscow to continue to produce oil, writes Reuters. “The oil price cap proposal would effectively institutionalize the Urals discount and consequently further lower the dollar value of the Russian government’s primary revenue stream”, they said. We at EPM remain amazed at the willful disregard in policy circles of Putin’s threat that he will not sell any oil to countries that support the price cap plan – especially since he backed his threat to natural gas with action. And, we remind our audience, in a geopolitical conflict, economics do not drive decision making. So while it would make economic sense for Russia to continue selling oil under the price cap, for a variety of reasons, we believe that will not be what determines the Russia’s final decision and response to the cap.
US – SHALE PRODUCTION TO GROW?
Javier Blas over at Bloomberg looks at the potential for US Shale oil to grow production. He notes that it was the era of ultralow interest rates in America that helped to propel the drilling boom in the Permian. Consequently, the biggest oil bonanza the US has seen wasn’t only based on geology, technology and American ingenuity – the printing presses of the Federal Reserve helped considerably. With monetary tightening now being the Fed’s policy of choice, rather than monetary ease-ing, new additional investments that could grow US shake oil production may be deterred.
Macro-Economics
IMF – DOWN GRADES THE GLOBAL ECONOMY
As we predicted earlier, the IMF further downgraded its growth outlook for the global economy, this time to 2.7% for 2023, the first time since 2000 that the IMF has predicted global economic growth of less than 3% for the following year, writes Nikkei Asia. “The three largest economies -- the United States, the European Union, and China -- will continue to stall”, it said. “In short, the worst is yet to come, and for many people 2023 will feel like a recession”. Rapidly tightening monetary policy is a major factor in the dimming outlook, the fund said. At EPM over July and August, we warned against using the forecasts of the global financial institutions as a basis for scenario planning. We explained that they typically underestimate approaching headwinds, which translates into numerous sequential downgrades of their growth forecasts during times of turbulence as today. Meaning, that if you rely on them, you will always find yourself behind the curve, responding rather than anticipating.
BANK OF KOREA – RAISED KEY INTEREST RATE
The Bank of Korea raised its key interest rate by half a percentage point on Wednesday, primarily to fight a weakening currency burden Asia's fourth-largest economy, writes Nikkei Asia. The Korean won has dropped sharply against the US dollar, losing 20.7% of its value so far this year, which translates into a significantly higher energy bill for the energy-poor country, which in turn drives inflation in the country.
Energy Transition & Technology News
INDONESIA PLANS TO DEVELOP A FULL VALUE CHAIN FOR EV PRODUCTION
Indonesia aims at developing the full value chain for electric vehicles, from the mining of critical raw materials such as nickel, through battery manufacturing, to EV manufacturing.
INDONESIA PLANS TO DEVELOP HYDRO POWER
Among factors holding back potential investors, is the “dark grey colour” of Indonesia’s current electricity, which comes mainly from coal. The Nikkei Asia report on the Kayan Cascade project for production of green hydro-electricity, on the island of Kalimantan where Indonesia’s new capital “Nusantera” is to be developed, is of importance, therefore, as it aims at addressing this issue. The project will include a series of dams and is part of China's Belt and Road Initiative. Japanese trading house Sumitomo signed a partnership agreement with Power Construction Corp. of China (PowerChina) worth $17.8 billion to jointly develop the project, which will include construction of five dams along the Kayan River forecast to generate 9 gigawatts, possibly making it the largest hydroelectric station in Southeast Asia.
SPANISH AND DUTCH INTERESTS TO DEVELOP GREEN HYDROGEN CORRIDOR
Madrid-headquartered energy firm Cepsa said it would work with the Port of Rotterdam to develop “the first green hydrogen corridor between southern and northern Europe”, writes CNBC. The co-operation is part of Rotterdam’s ambition to supply Northwest Europe with 4.6 million tonnes of green hydrogen by 2030.
The Electrification of Transport
CHINESE FLYING DEBUTS IN THE UAE
A “flying car” built by Chinese electronic vehicle maker Xpeng made its first public flight in the United Arab Emirates, writes Reuters. The X2 is a two-seat electric vertical take-off and landing (eVTOL) aircraft lifted by eight propellers - two at each corner of the vehicle. On Monday the company successfully completed an unmanned, 90-minute test flight in Dubai.
ESG
MORE MAJOR FINANCIERS STAYING AWAY FROM COP27
Bloomberg reports that BlackRock CEO Larry Fink won’t be at the COP27 summit in Egypt next month and will instead attend a meeting of the firm’s board of directors, according to people familiar with his plans. Citigroup CEO Jane Fraser will also stay away, as will Bill Winters of Standard Chartered, spokespeople for the banks said. All three made a point of attending in 2021. Attention has shifted to navigating the fallout from war, energy shortages, inflation and the threat of recession.