Energy, Politics & Money - 14 October 2022 Pt. 2
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 the macro-economic outlook. The US fad has already been quietly reducing its balance sheet, which is one of the drivers behind the dollar’s strength. Over in Europe the ECB would like to start doing the same in 2923, but we at EPM believe it will be challenged to do so, as government interventions in the energy market amidst structurally higher exchange rates will probably translate into pressure on the ECB to continue buying sovereign debt on the continent.
Furthermore, we look at:
The IMF’s call to Asian countries to keep raising interest rates to protect their currencies, which is as we expected at EPM and means the US Fed’s efforts to slow down the US economy will have the effect of the slowing down the global economy
An analysis of why the harsh words over the OPEC+ quota decision between the US and Saudi are unlikely translate to any meaningful changes in the relations, exactly as we at EPM have been arguing from the very beginning
The pullback by the world’s leading banks from Net Zero
The risk of uncontrolled deindustrialization in Europe as a result of its sanctions policy vis-à-vis Russia
The Japanese government’s decision to become “natural gas purchaser of last resort”, as the competition for LNG that has resulted from the cut off of Nordtstream 1 and 2 drives up prices to the point that traditional Japanese importers might be pushed out of the market
A hard-hitting Bloomberg review of the ExxonMobil corporate culture
General Energy News
Brent crude futures are currently relative stable around the $94 per barrel level, while WTI crude futures are around $89 per barrel, as the OPEC+ quota decision is currently offsetting fears of a global recession.
Macro-Economics
Most Asian central banks must tighten monetary policy further as rising commodity prices and their currencies' depreciation, driven by steady US interest rate hikes, push inflation above their targets, the International Monetary Fund said on Thursday according to Reuters. This is aligned with the early EPM forecast as to how the US Fed’s monetary tightening would play out globally: other countries are forced to follow to protect the value of their currency, meaning the slowdown of the economy targeted by the Fed will occur globally, i.e. a global recession.
Bloomberg writes the European Central Bank officials aim to start unwinding the institution’s €5.1 trillion ($4.9 trillion) balance sheet asset by early 2023. The officials favor letting bonds mature rather than resorting to debt sales, though that option isn’t entirely excluded. At EPM we believe there is a good chance the ECB will find it very difficult to execute this ambition early 2023. With European countries all dedicated to intervening in the energy markets to keep prices for households and industry low, without knowing exactly what liability they are taking on, and interest rates at a significantly higher level, there is a good chance that at least some countries will push for the ECB to continue buying sovereign debt.
Geopolitics
While the US continues to push the narrative that Saudi is acting against US interests within OPEC+, Bloomberg reports the US now says Saudi coerced other OPEC+ countries into agreeing to a huge cut in oil production last week, Reuters agrees with the EPM view that the verbal spat between the US and Saudi about the recent OPEC+ decision will not fundamentally alter relations between the two countries. Despite the testy exchanges, it says, both sides face constraints in how to pressure each other in practice. Also, Washington will not want to do anything to risk the security of the kingdom’s oil sector, as any damage to it would send prices spiraling even higher and possibly drive Riyadh closer to China and Russia. And Riyadh, for its part, is aware it cannot easily diversify arms supplies for its military, which has been overwhelmingly equipped and trained by the United States ever since the two countries forged their mutually beneficial relationship in 1945.
Nikkei Asia spoke with retired Singapore Ambassador Bilahari Kausikan, former permanent secretary of the city-state's foreign service, to reflect on the Chinese leader's style and how U.S.-China tensions may play out in the years ahead. According to Kausikan, China has made three very fundamental foreign policy mistakes under Xi. The first big mistake was prematurely abandoning Deng Xiaoping's approach of “hiding your capabilities and biding your time”. The trigger point there was the 2008 global financial crisis. The second connected mistake is again around 2008, when China’s leaders actually began to believe their own propaganda. And the third, in Kaushik’s view, is the “no limits” partnership with Russia, as he believes this will make Russia a permanent liability to China.
Energy Transition & Technology News
Bloomberg writes, several of the largest banks, including JPMorgan, Bank of America, and Morgan Stanley, headed into the 2021 United Nations Climate Change Conference (COP26) as members of the world’s biggest zero-carbon finance club. Their membership in the Glasgow Financial Alliance for Net Zero (GFANZ), a group of roughly 500 financial sector entities, publicly committed their banks to reach net-zero carbon emissions by midcentury. But, by September 2022 they were among a faction ready to quit, worried they may have jumped on the bandwagon too soon, especially as oil and gas companies have experienced a market resurgence. Global bank lending to fossil fuel companies is up 15%, to over $300 billion, in the first nine months of this year, from the same period in 2021.
Shell has signed an agreement in Australia to develop a 500 MW battery energy storage system in the central west region of Australia's New South Wales (NSW) state, writes Reuters. Shell will hold the rights to charge and dispatch energy once the project becomes operational, which in the EPM view indicates Shell sees this as an electricity trading play.
As more cars shift to battery power, retail gas stations need to find other ways to lure customers. With 46,000 stations in 80 countries, Shell is the world’s biggest gasoline retailer and thus the most exposed to this trend. Bloomberg reports that the company is now testing new business models to preserve a “value add” for these real estate locations in an electrified future. For example in China Shell is busy cementing deals with fast-food and coffee chains for its stations.
The Global Energy Crisis
Europe faces gas insecurity, and as a result “uncontrolled deindustrialization”, through to 2025, as a result of its sanctions policy vis-à-vis Russia, writes S&P Global.
On the subject, BNEF has prepared an overview of what Europe’s energy future could like without Russian gas. Demand destruction is essential to Europe making it through the winter without Russian gas, it concludes. At EPM we note, this means high prices are necessary from a supply / demand perspective, and thus an energy price induced recession in Europe is unavoidable if Russia cuts back further on gas supplies. The continent will be forced to shut down industry either due to high energy costs, or due to a lack of supply.
The Japanese government plans to buy liquefied natural gas in the event companies can’t secure cargoes, writes Bloomberg. The move comes as global competition over LNG intensifies, with Europe seeking to replace Russian pipeline supplies that have been cut off in the wake of the invasion of Ukraine. That’s putting pressure on big importers like China, Japan and South Korea as they brace for the upcoming winter.
Other
A hard-hitting Bloomberg piece on the “internal revolt” ExxonMobil is experiencing. As ExxonMobil makes more money than it has in its 140-year history, the company has experienced the highest attrition since its merger with Mobil in 1999. Of the 12,000 departures globally in the past two years, less than half were from layoffs. Bloomberg believes there is one overriding reason talent is fleeing: a culture that’s increasingly out of step with the world around it. Those interviewed describe an organization trapped in amber, whose insular and fear-based culture—once a beacon of corporate America—has become a drag on innovation, risk taking, and career satisfaction. Although many expressed pride at working for an industry leader, they were also frustrated by how slow it was to invest in some of the energy industry’s biggest breakthroughs over the past decade, including shale oil and low-carbon technologies, making it a place where the best and brightest no longer want to spend their best years. CultureX, an organization out of MIT that evaluates corporate culture based on Glassdoor reviews, says these problems run so deep that Exxon now ranks below industry benchmarks for 143 of the 196 cultural issues it measures.