Energy, Politics & Money - 14 December 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, we take a closer at a ground breaking moment in climate politics, as the EU approved its Carbon Border Adjustment Mechanism (CBAM) – a set of levies put on imports based on their carbon intensity that is set to be effective from October 2023. The system will at first be applied only to iron and steel, cement, fertilisers, aluminium, electricity, hydrogen and some chemicals. But you should expect that list of products to grow quite rapidly, with refined fuels added once the situation in Ukraine is stabilized.
If you don’t have time to read today’s column right away, here are some main points included in today’s roundup, we look at:
COVID developments in China – and as predicted by EPM last week – namely that restriction reductions have not led to economic growth as the virus appears to be spreading at lightning speed and causing new and additional disruptions in the supply chain
HSBC’s decision to put a complete stop on funding new oil field projects
Blackrock’s warning the global economy is in for a major recession unlike anything seen over the past 40 years (confirming EPM’s macroeconomic outlook)
The US agreement with Japan and The Netherlands on the near-total blockade of semiconductor equipment to China and limiting its ability to buy equipment necessary for producing leading-edge chips
Daniel Yergin’s realistic look at the energy transition, how fast it could be done, and what challenges will have to be overcome.
Michael Liebrich’s update on his classic hydrogen analysis from two years ago “Separating Hype from Hydrogen” where he notes that while demand growth is even more likely to disappoint the hype associated with Hydrogen has grown even more.
Celebrating the fusion breakthrough responsibly because the current system used 400 MJ of energy to generate through fusion 2.5 MJ of power
Chinese claims that they produced green hydrogen by splitting seawater without needing to desalinate seawater
General Energy News
Exactly as predicted last week by EPM, supply chain issues are developing in China as a result of the relaxation of COVID restrictions. Apps developed to manage movement of individuals, mass PCR testing, and lockdowns at city level ended and, as a result, the virus is spreading through the country more or less freely.
Beijing public health authorities reported 22,000 visitors to clinics with fever on Sunday, reports Nikkei Asia, a 16-fold surge from a week earlier and people are reported to be lining up at hospitals. The report quotes an executive at a big Japanese company operating in Beijing, who said that between employees who may have contracted COVID-19 and those looking to avoid risking infection, “only around 20% of people are coming into the office”. Experts predict China will now experience what other countries experienced in 2020 and 2021 – a squeeze on already swamped hospital emergency rooms and intensive care units, and increased health care worker burn out writes again Nikkei Asia.
HSBC will no longer provide new lending or capital markets financing to new oilfield projects as part of a wider update to its energy policy, reports Reuters. But, for now, it will continue to fund natural gas projects given the global energy crisis and the pressures placed on natural gas supply by the war in Ukraine.
Macroeconomics
As you now, we launched EPM to provide the foresight that enables you to position in the market ahead of the crowd. When it comes to macroeconomics, over past months we have been arguing the case that global disruption is under way, due to demographic changes (population decline in the world’s major markets), geopolitics (US – China conflict causing regionalization), and monetary policy (from loose to support the market, to tight to fight the inflation that has resulted). We hope you have positioned accordingly, because the crowd will soon be, as Blackrock released a report saying “a recession is imminent” and that in the coming economic disruptions “previous investing approaches won't work anymore”, writes Business Insider
Nikkei Asia reports that the Asian Development Bank has again downgraded its economic outlook for developing Asian countries for 2022 and 2023 as the global slowdown and a prolonged war in Ukraine weigh heavily on the region. The ADB trimmed its 2023 growth outlook for developing Asia – which covers 46 regional members of the bank – to 4.6% from 4.9%. The region will likely end the current year with a 4.2% expansion, slightly lower than the 4.3% forecast in September.
Geopolitics
Japan and the Netherlands have agreed in principle to join the US in tightening controls over the export of advanced chip making machinery to China writes Bloomberg. In the coming weeks, the two countries are likely to announce that they will adopt some of the sweeping measures the US rolled out in October designed to restrict the sale of advanced semiconductor manufacturing equipment. The three-country alliance would represent a near-total blockade of China’s ability to buy the equipment necessary to make leading-edge chips.
Energy Transition & Technology News
Daniel Yergin writes, “as the global consensus around the energy transition becomes stronger, the challenges to that transition are also becoming clearer”. Fundamental to his point is that it is easy to develop an energy transition target but it is also much harder to plan an actual transition let alone deliver it. He sees four main challenges, which together will define how quickly the envisioned energy transition will be delivered – if at all. They are:
Energy security
Macroeconomic impacts
The North-South divide, and
Minerals.
At EPM we agree with the view that established decarbonization and energy transition targets are unrealistic (they are necessary, but, sadly unrealistic). We are also agnostic as to policy – our members have their personal beliefs about what policy should be – but as an organization our focus is on understanding the impact of policies on energy transition. EPM focuses, therefore, on the likely impact of established decarbonization and energy transition targets. We strongly believe these targets indicate a true intention to move away from fossil-based energy. And, even if just half of the targets are met by 2030, or 2040, or 2050, that would entail a massive disruption of the global energy system and the markets where crude oil, natural gas, and refined products are traded. This is the future that investors need to recognize, realise, and plan for accordingly.
Over at Bloomberg New Energy Finance, Michael Liebrich looks back at his hydrogen study Separating Hype from Hydrogen.
On the supply side, Liebrich was optimistic at that time: green hydrogen (produced from renewable energy) would over time become cheaper than blue hydrogen (produced from natural gas but with carbon captured) and eventually be cheaper than gray hydrogen (produced form natural gas without carbon capture).
On the demand side he was more skeptical. While clean hydrogen will be needed to decarbonize a number of use cases in industry, and perhaps for long-duration storage, he found it hard to identify any role for it in applications like land transportation or space heating.
At EPM we must admit that we found his arguments compelling and convincing. What has changed since then, Liebrich says, is that he has become even more bearish on demand. He now believes hydrogen will play an even more limited role in industrial heating. A more important development, he says, is that the hype around hydrogen has only gotten stronger. There is indeed an echo chamber where everyone cites and the same reports, written by the same consultant, who then get hired to advise on the hydrogen strategy. For investors, this is a very, very dangerous situation. At EPM we therefore again call for caution when it comes to hydrogen investment.
There are certainly opportunities, but the prudent approach would be to target investment in areas that look at existing hydrogen demand, rather than speculative new sources of demand, which may or may not come to fruition.
As to the much-discussed US National Ignition Facility (NIF) fusion breakthrough – essentially that more energy was created than the energy used – an analysis over at BigThink argues it is much hyped. It says the laser energy delivered to the target was 2.1 MJ and the fusion output was likely about 2.5 MJ. However, the input energy used to power the laser system was somewhere between 384 and 400 MJ. This means the system used 400 MJ to produce 2.5 MJ. The conclusion therefore is to “celebrate responsibly”. BigThink notes that “We should laud the scientific accomplishments of NIF. Many years (and careers) of hard work are producing progress on one of the most difficult applied science problems ever tackled. Scientifically, it’s symbolic progress. But it’s not a breakthrough, a game-changer, or the herald of imminent clean fusion power. NIF is still decades away from economically viable fusion.”
The Financial Times writes that researchers in China claim to have produced hydrogen by splitting seawater without need for desalination or purification. Splitting water using electrolysis is relatively straightforward and is used in some hydrogen-generating facilities with access to a conventional water supply. Electrolysis takes place in an electrolyser and uses electricity to separate hydrogen from oxygen and allows the hydrogen to be siphoned off. But, when using seawater, this process is more complicated because salt and other impurities can effectively destroy the electrolyser. One option – which is proven to be costly – is to desalinate and purify seawater before processing it.
Climate Politics
The EU implemented its Carbon Border Adjustment Mechanism (CBAM) yesterday. Effectively, it is a set of levies on imports based on their carbon intensity reports the Guardian. In EPM’s view this is truly a breakthrough moment in climate politics as it makes the EU’s carbon emissions tax go global – it now affects everyone with an ambition to export to the UE irrespective of where production facilities might be located. The system will be applied at first to iron and steel, cement, fertilisers, aluminium, electricity, hydrogen and some chemicals. But, our readers should expect the list of products will grow quite rapidly with refined fuels added once the situation in Ukraine stabilizes. If all goes according to plan, the CBAM will come into force on a trial basis from next October.
The Global Energy Crisis
Reuters takes stock of the current Global Energy Crisis says “2022 will be remembered as the year Russia's invasion of Ukraine accelerated a global energy crisis”. It goes further and says, “The invasion, and subsequent Western sanctions, heaped new pressures on oil and gas supplies already strained from the rapid economic rebound from the pandemic… The disarray has not ended. Major industrialized economies are girding for supply constraints in 2023 as well, if not for years after that”.