Energy, Politics & Money - 13 July 2023
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we look at:
The recent price increase for sour heavy crude oil grades, which has pushed Russia’s Ural grade above the price cap of $60 per barrel
What would happen if the Saudi’s make “management of global oil markets” their longer-term strategy
The focus of the incoming U.S. Joint Chiefs of Staff, nominee General Charles Brown, who said that under his watch the US military will seek more operational sites in the Indo-Pacific region and work to strengthen Taiwan's self-defense capabilities
Industrial thermal batteries, which allow storage of heat generated via electricity, over longer periods of time
The risk of the global car business being broken up under influence of the US – China geo-strategic competition
The view of the International Gas Union (IGU) that the crisis on the LNG market is not yet over and risks remains elevated
General Energy News
Brent broke through $80 per barrel yesterday, and WTI through $75 per barrel.
Building on what EPM discussed yesterday - that the market for sour heavy crude grades is feeling the impact of the production cuts of Saudi and Russia - S&P Global reports the value of Russia's key Urals crude export grade has hit $60/b for the first time since the US-led G7 coalition rolled out its price cap on Moscow's oil. Platts, part of S&P Global Commodity Insights, assessed Urals on a FOB Primorsk basis at $60.32 /b on July 11. traders and shippers will only now have to worry about falling foul of the price cap ceiling on Russian crude, and it remains to be seen how they will respond.
Energy Intelligence looks at what would happen if the Saudi’s make “management of global oil markets” their longer-term strategy, i.e. they decide to more regularly surprise the market with unilateral “million barrel”-range production adjustments. The last time Saudi Arabia took on the mantle of swing producer, in the mid-1980s, it did not work out well. The Kingdom’s output slid to nearly nothing, and it ended up slashing prices to buy its way back into customers’ hearts and imprint the requirement for “discipline” on quota-busting OPEC members. The Saudis vowed never to act as swing producer again, and mostly they haven’t. Until now. To succeed this time around, any market management effort would need widespread supply reductions to balance the decline in demand. The Saudis can’t be the only ones cutting production, or any such effort on their part will end in tears, as it did in the 1980s.
Geopolitics
President Joe Biden's pick to head the U.S. Joint Chiefs of Staff, nominee General Charles Brown, has said the military under his watch would seek more operational sites in the Indo-Pacific region and work to strengthen Taiwan's self-defense capabilities, writes Nikkei Asia. Brown told the senators, with an eye on China.
I'm mindful of the security challenges at this consequential time and the need to accelerate to stay ahead of the growing threat. The Department of Defense must implement the national defense strategy and prepare a joint force that can win the next war, if called upon.
Brown served as commander of the Pacific Air Forces from 2018 to 2020 before becoming the chief of staff of the Air Force. To respond to crises in the Indo-Pacific, he has advocated transitioning the air forces from large bases to smaller sites spread across the region.
Energy Transition & Technology News
We share Forbes’ look at industrial thermal batteries. It reports U.S. industrial facilities are directly responsible for roughly a quarter of the country’s greenhouse gas emissions. Around 84% of energy-related industrial emissions come from burning fossil fuels to provide heat for manufacturing processes like melting metals, forming plastics, and driving chemical reactions. Decarbonizing industrial heat is crucial to meeting the United States’ emissions reduction commitments. A thermal battery converts electricity into heat, stores the heat for hours or days, and can deliver output heat at temperatures up to 1,500-1,700 °C when the heat is needed by the industrial user with 95% round-trip efficiency. New research shows that these batteries can provide reliable heat at $35 to $62 per megawatt-hour (MWh) of thermal output, bringing the costs of producing heat from electricity down to a level that is competitive with continuing to operate existing natural gas equipment.
The Electrification of Transport
Over at the Financial Times, Chris Miller, the author of “Chip Wars”, looks at the Chinese carmakers’ global expansion, and what implications this will have for the political-economy. The transition to electric vehicles has given Chinese companies an opportunity to leap ahead, he says. The surge of Chinese cars into foreign markets poses two dilemmas that will complicate trade. The first relates to security. New cars feature dozens of sensors, complex software systems and semi-autonomous capabilities. Western leaders have only just begun to consider the security implications of fleets of foreign-made, sensor-stuffed cars on their roads. Beijing, by contrast, has imposed strict data localisation rules on Tesla — China is its biggest market outside the US — and banned Tesla’s cars from sensitive locations. The second challenge is to Europe’s industrial base. Legacy automakers, especially in the price-sensitive middle market, face tough competition. Chinese cars source components mostly from Asia, not from Europe; facing a surge of Chinese car imports, some European businesses are calling for help. Chinese EVs are high quality, though their price competitiveness has benefited from a decade of protectionism and government support totaling tens of billions of dollars annually. The US has managed the latter risk with the IRA.
The Inflation Reduction Act provides generous subsidies for EVs that meet local content thresholds, excluding Chinese vehicles. In the face of these tariffs and subsidies, Chinese companies simply can’t compete in the US. But the EU’s car market remains open to imports. Miller’s conclusion is that there exists a real possibility of the car business being broken up under the influence of geopolitical tensions.
The Global Energy Crisis
The International Gas Union (IGU) says prices of liquefied natural gas (LNG) have eased from record highs seen following Russia's invasion of Ukraine but the risk of a return to 2022 market conditions remains elevated according to Reuters. Buying LNG to replace curtailed Russian flows helped Europe weather the first winter of the Ukraine conflict, with the continent importing 66% more LNG in 2022 than the previous year. Spot LNG prices hit a record $70.50 per million British thermal units (MMBtu) in 2022 but have dropped nearly 83% since. IGU President Li Yalan remarked, “Prices eased in 2023, but the level of risk and uncertainty remains high; the market is still out of balance; and the crisis is not yet over" The IGU, which has more than 140 members representing more than 95% of the world’s gas market, said that Australia retained its position as the largest exporter in 2022 followed by the United States. Qatar and Russia remained as the third and fourth largest exporters respectively.