Energy, Politics & Money - 13 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 take a closer look at the IEA’s view that of expected crude oil demand growth during Q3 and Q4, 2023 will likely cause the market to tighten. This view is not agreed with by everyone, because there remain big uncertainties in the global economy.
EPM’s perspective is that economic growth is most likely to disappoint, because the impact of central bank rate hikes has been consistently underestimated – the banking crisis being a recent example of that.
Additionally, China’s economic growth has so far been disappointing versus the conventional outlook – not versus EPM’s outlook because immediately following the lifting of COVID lock downs and associated restrictions we predicted it would take China time to recover, but this too means it is likely to under perform versus the assumptions of the IEA (and the perma-bulls at Goldman Sachs).
Furthermore, we look at:
US Core Inflation, which is higher than expected, and thus increases the chances of higher for longer interests rates – with all the implications that has for the global economy
The changes in the levelized cost of energy in the US in 2023, which reveal where the renewable energy industry is heading: consolidation
The strong decline in the spot price for lithium in China, which has wiped out all its gains since November 2021
The US Environmental Protection Agency (EPA) proposal for sweeping emissions cuts for new cars and trucks through 2032
Germany’s preparations to shut down its three remaining nuclear power plants this coming Saturday
General Energy News
According to Reuters, Fatih Birol, Executive Director at the International Energy Agency, said the global oil market could see tightness in the second half of 2023 and push oil prices higher. The primary reason is the most recent (surprise) OPEC+ production cut of 1.66 million barrels per day (bpd), from May until the end of 2023.
The financial markets appear not convinced by this thesis. Worries about the global economic outlook, which calls into question the demand side of the “tightness towards the end of 2023” thesis, which of course assumes a significant growth in demand during 2H2023, abound says Reuters. EPM’s perspective is that economic growth is most likely to disappoint, because the impact of central bank rate hikes has consistently been underestimated – the latest banking crisis being a recent example of that.
As EPM highlighted earlier this week, the Chinese recovery has so far been disappointing. This is also evident in the latest data regarding Chinese crude oil import and refined products exports. Together, they show that actual fuel demand growth in China's domestic was very modest in the first quarter, says Clyde Russell of Reuters.
Immediately following China’s lifting of COVID lock downs and restrictions at EPM, we predicted it would take time for China to recover; we are not surprised by the first quarter Chinese economic data. But we do highlight that most of the oil demand outlooks predicting a return to $100 oil in 2023 assumes strong Chinese demand growth, so you may ask yourself well are these outlooks supported by fact?
Bloomberg reports that throughout 2022 and 2023, stockpiles of crude oil in OECD nations swelled by almost 130 million barrels.
Macroeconomics
A key measure of US inflation showed hints of moderating in March, but likely not by enough to dissuade the Federal Reserve from raising interest rates again next month, writes Bloomberg. The core CPI, which economists view as the better indicator of underlying inflation, was up 5.6% from a year ago. It’s the first time in over two years that the core came in above the overall measure, which was up 5%. You probably don’t need us at EPM to point out that this increases the chances of higher for longer interests rates – with all the implications that has for the global economy.
Geopolitics
On the heels of French president Emmanuel Macron, Germany's foreign minister Annalena Baerbock will visit China on Thursday. According to Reuters, she will be in “damage control” mode. Macron provoked a backlash in the United States and Europe when he called on the European Union to reduce dependence on the US and cautioned against being drawn into a crisis over Taiwan driven by an "American rhythm and Chinese overreaction". Comments which many European politicians, diplomats and analysts saw as a gift to Beijing's goal of dismantling transatlantic unity.
The most ardent supporters of the US in Europe – a significant number of whom hail from Eastern Europe – therefore hope that Baerbock set out a clear and united EU line on China aligned with the US.
EPM’s perspective on this is that in principle, in a global power competition, as long as the outcome is undecided, the worst one can do is pick sides. If, therefore, Europe thinks independently, it should not openly side with the US and adopt the US’ perspective on matters of geopolitical importance. Rather, Europe should try to remain in “neutral” with both the US and China. The US’ leverage over the EU (military dependency, dependency on the US dollar for international trade) makes this very hard, however.
Consequently, one would expect even an independently thinking Europe to be more aligned with the US than strictly neutral. But we don’t believe Europe is truly independent in thinking. Which is not only too bad for the average European, as this means they will directly or indirectly be dragged into geopolitical conflicts in ways that do not serve their interests, it also means that Baerbock is indeed most likely to take a position opposite of Macron when it comes to China. And that, of course, raises questions about the European Project.
Energy Transition & Technology News
The average costs to produce onshore wind and solar power in the United States have increased for the first time since 2009 as steel and silicon became more expensive and supply chains were disrupted, Reuters reports based on research from the investment bank Lazard. The levelized cost of energy had been decreasing for the past 15 years. Now, cost inflation and supply chain disruption have helped push the average unsubsidized cost of producing large-scale solar power to $60 from $36.
But, and this in the EPM view is important, because the figures are averaged. Lazard also found the lowest cost projects were charging as little as $24 per megawatt hour for utility-scale solar and still covering their costs, which was $30 in 2021. Lazard said in response
Companies with scale and broad expertise and ability to project into some of this complexity have been able to hold costs down. This suggests this industry is going to become more consolidated and scale players are going to do really well.
After a searing two-year run, the spot price for lithium in China has wiped out all its gains since November 2021, writes Nikkei Asia. This fall in lithium prices coincided with a slowdown of growth in China's EV market as consumer spending was dented after three years of pandemic restrictions and after the expiration of a government subsidy for EV purchases, it says. Analysts widely predict that the drop in lithium carbonate prices will continue as downstream companies in the industry are still working to clear their inventories.
The Electrification of Transport
To ensure two out of every three new vehicles automakers sell will be electric within a decade, the US Environmental Protection Agency (EPA) is proposing sweeping emissions cuts for new cars and trucks through 2032, writes Reuters. The proposal represents the most aggressive US vehicle emissions reduction plan to date, requiring 13% annual average pollution cuts and a 56% reduction in projected fleet average emissions over 2026 requirements. The EPA is also proposing new stricter emissions standards for medium-duty and heavy-duty trucks through 2032.
The Global Energy Crisis
Germany is on course to shut down its three remaining nuclear power plants on Saturday, writes Sky News. The country began phasing out nuclear power more than 20 years ago - but plans were escalated following Japan's Fukushima nuclear disaster in 2011. Germany was forced to delay the closure of three remaining plants – in Emsland, in the northern state of Lower Saxony, and the Isar 2 and Neckarwestheim reactors – after Russia cut off European gas supplies amid its war in Ukraine, sparking fears of a winter fuel crisis. German, however, believes it won’t need this power during the winter of 2023 – 2024, which in EPM’s view raises the possibility of a worse energy crisis then.
Other
Royal Bank of Canada topped JPMorgan Chase & Co. last year to become the world’s largest backer of fossil-fuel companies, Bloomberg writes. Royal Bank provided $42.1 billion of funding to the industry, up 4.2% from a year earlier, surpassing the $39.2 billion provided by JPMorgan.