Energy, Politics & Money - 14 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 look at:
The reasoning of OPEC+ for its recent (surprise) production cut
The Biden administration’s tepid response to the OPEC+ cut, in contrast to its response to the October 2022 cut
Sinopec’s 5% entry into QatarEnergy’s $28.75 billion North Field East (NFE) expansion projects
The view that the ECB’s balance sheet remains too big, and thus it should continue not only to raise interest rates but also its direct monetary tightening
The IEA view that clean energy is moving faster than most think
The startup Equatic, which does DAC in the oceans
The data proving that co-firing ammonia with coal is not a CO2 abatement opportunity
The challenges facing the EV revolution in the US, and why this means the EPA proposal for new emission rules (which EPM discussed earlier this week) is a case of “too much too soon”
The misguided view among some in Germany that the energy crisis is over – EPM believes it’s just on a weather induced pause
The outlook for France’s water supply, which poses a significant risk for its all-important nuclear industry over the summer period
General Energy News
OPEC on Thursday flagged downside risks to summer oil demand as part of the backdrop to output cuts announced this month by OPEC+ producers, shedding further light on the factors behind the surprise move that has led to a rise in oil prices, writes Reuters. This new confirms EPM’s assessment, in which we said that in addition to wanting to punish short sellers in the financial markets (long a major thorn in the side of the Saudi energy minister), the leadership of the cartel also feared a spillover of the banking crisis into the real economy. These factors, coupled with the US decision not to refill the Strategic Petroleum Reserve (SPR) during 2023 left OPEC+ fearing for demand.
Reuters also notes the tepid response of the Biden administration to this cut, and contrasts it with its response earlier in October 2022. At that time EPM’s view was that the Biden response was primarily designed for a domestic US audience, part of the mid-term elections at that time. Because, we said, the OPEC+ cut only reduced the quantum and not actual OPEC+ production. Reuters said at the time the Biden administration saw the market as tight with limited barrels in storage. EPM’s response is that if the Biden administration really believed that (which we still do not think it did…), they were horribly off, as evidenced by the fact that prices kept going down over the months that followed. This time, Reuters says, the Biden administration believes the global economy is in better shape and inventory levels are much healthier – a view we at EPM also disagree with. Inventories are indeed in better shape, but the economic outlook is such that the production cut is unlikely to raise prices much over coming months, in our view.
QatarEnergy has struck a deal with China’s state-owned Sinopec to sell a 5% stake in its $28.75 billion North Field East (NFE) expansion writes Energy Voice. Sinopec signed a 27-year deal to to acquire 4mn tpy of LNG from the NFE project in November 2022, the longest LNG supply agreement in the industry.
Macroeconomics
The European Central Bank should speed up the reduction of its balance sheet and could stop reinvesting cash from debt maturing in its largest bond buying scheme to complement further interest rate hikes, Pierre Wunsch, a member of the ECB's Governing Council, says according to Reuters. Wunsch, among the first last year to recognise Europe's inflation problem, said the ECB’s balance sheet reduction of 15 billion € per month, in its 3.2 trillion € Asset Purchase Programme, says this process has gone well but that the ECB Balance Sheet still remains too big. He also said the ECB needs to keep raising interest rates and the market's expectation for another 75 basis points of increases was "reasonable," but expectations of a rate cut around the turn of the year were not. Wunsch said:
I think May will be about 25 or 50 basis points. If there's another upside surprise in core inflation and the (ECB's quarterly) lending survey doesn't look too bad, we might have to do 50. If there is a positive surprise in core, then perhaps 25 is more appropriate.
We at EPM want to push back against the idea the US dollar is in for an imminent decline due to “de-dollarization” of the global economy and we highlight an opinion piece over at Bloomberg that clearly sets out the facts.
The dollar is estimated to be used for 88% of all international transactions.
The euro is used for an estimated 31%, and as such only a modest competitor.
The euro, unlike the dollar, will never be tied to a single national government, and the European Union does not come close to the military might of the US.
The yuan, meanwhile, is estimated at only 7% of the total of international transactions, and China seems unwilling to open up its capital markets, as that could lead to rapid capital outflows and possibly a financial crisis.
Without open capital markets, the yuan is not a strong contender for a global reserve currency.
Ergo, the dollar should be expected to retain its central role for the foreseeable future.
Geopolitics
The FBI on Thursday arrested Jack Douglas Teixeira, a 21-year-old member of the U.S. Air National Guard, over the leaks online of classified documents that embarrassed Washington with allies around the world, writes Reuters. Teixeira was an airman 1st class at Otis Air National Guard Base in Massachusetts, according to his service record. He joined the Air National Guard in 2019 and worked as a "Cyber Transport Systems Journeyman," or an IT specialist. At EPM we note that was is left is unclear is how someone such as Teixeira could get his hands on hardcopies of documents classified Top Secret and NOFORN. He may have posted them online, but we doubt he is the real source of the leak – the objective behind which remains unclear.
Energy Transition & Technology News
Clean energy is moving faster than you think, Fatih Birol of the IEA writes for the Financial Times. He says that following the Ukraine War, a renewed focus on energy security has emerged, leaving a peak in fossil fuel demand clearly visible for the first time and set to happen before the end of the 2020s, because governments are pushing harder on the energy transition.
For example, the sale of heat pumps have been growing rapidly over the past two years, in Europe and elsewhere. Continued growth at this rate would almost double their share of heating in buildings worldwide by 2030. They are already outselling gas furnaces and boilers in the US and in a growing number of European countries — and demand remains robust in China, the world’s largest heat pump market. And, electric car sales are soaring as well, accounting for close to 15 per cent of the global car market in 2022, up from less than 5 per cent just two years earlier.
The transition to clean energy is also accelerating in other sectors, including those where emissions are most challenging to reduce, such as steel. The project pipeline for producing steel with hydrogen rather than coal is expanding rapidly. If currently announced projects come to fruition, we could already have more than half of what we need in 2030 for the IEA’s net zero pathway.
Forbes looks at the innovative company Equatic, which has developed technology to suck CO2 out of ocean water enabling it absorb more CO2 from the air. The advantage of this process? It tackles the challenge that CO2 concentrations are 150 higher in water than air. What makes this possible? Equatic’s technology makes the CO2 in seawater react with calcium and magnesium, making calcium and magnesium carbonates, the materials chalk and seashells are made from while simultaneously producing Hydrogen as a byproduct.
Southeast Asian countries are being misled about the emissions savings potential of co-firing ammonia with coal, writes TransitionZero. Japan’s industrial heavyweights are peddling the narrative, but data analysis shows that a 20% ammonia co-firing coal plant would emit 94% more CO2 than the average unabated gas plant in Malaysia, 77% more in Thailand, 60% more in the Philippines, and 44% more in Indonesia. This is due to the very high embedded upstream emissions and energy losses from production of hydrogen and NH3, it says.
The Electrification of Transport
The EV revolution has never felt farther away, writes Business Insider. Detroit and Silicon Valley's well-funded push into electric vehicles is facing more speed bumps than ever — despite dozens of new models on the market, lucrative tax incentives, and massive investments in the nation's charging network, it says. At least $137 billion has been invested in new EV factories across the US over the past five years. Now, the industry's deep dependence on China in its supply chain — including at least 70% of EV battery production — and just how hard it is to break those ties, is coming to light. And it will take years to change this situation, even with the IRA in place. In addition, Detroit in particular has to deal with Tesla, which has a significant head start in the EV space. And then there are consumers, many of whom have not yet been won over. The above state reasons is why Michael Lynch over at Forbes argues the EPA’s proposal for new emission rules intended to increase the share of electric vehicles in new car sales is a case if “too much too soon”.
The Global Energy Crisis
Germany’s energy worries are over according to Bundesbank President Joachim Nagel, writes CNBC. He asserted that Germany’s progress in diversifying its liquefied natural gas supply away from Russia, and its increased storage — resulting from built up capacity during the mild winter — meant the country’s economy is well placed to weather the next cold season. At EPM we just want to note that what Nagel is missing is the cost at which the non-Russian energy supplies are being acquired, which leaves German heavy industry generally uncompetitive in the global market. This probably explains why, as CNBC also notes, the latest available purchasing managers’ index readings showed German manufacturing, which accounts for around a fifth of the country’s economy, experienced its sharpest fall in activity for almost three years in March and hit its lowest level since May 2020.
Very low groundwater levels have put France on course for a worse summer drought than last year, French geological service BRGM said according to Reuters. France suffered its worst drought on record last summer and, like most of Europe, faced a dry winter prompting concerns over water security across the continent. BRGM said:
The situation is worrying because the whole of France is affected and we have had several dry years.
At EPM we share this information because of France’s reliance on nuclear energy. In 2022 it was challenged because low water levels affect the availability of cooling water for nuclear power plants. Ergo, another year of drought in France is likely to increase pressures on Europe’s energy mix.