Energy, Politics & Money - 15 November 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you navigate chaotic times
In this roundup, we look at the new outlooks by OPEC and the IEA. These confirm an EPM’s outlook, which we have shared with you over recent weeks and months - that Crude oil demand is under pressure from the developing global recession. OPEC recognizes this and has lowered its demand outlook for the fifth time this year. Meanwhile, the IEA says Russian oil production is most likely to decline in 2023 as the country will unable to find new customers. These viewpoints should not be surprising if you have followed EPM’s analysis for some time. And, if you traded around our analysis and outlooks - first articulated in August and September - you would hold an excellent position now.
Furthermore, we look at:
The latest UN numbers about the global population, which we at EPM see as confirmation of our view that longer term, demographics will reduce global economic growth rates
China’s efforts to formulate a new economic stimulus package to avoid the Zero Covid policy from causing a wave of bankruptcies as a significant volume of bad debt matures at the end of the year
The first US – China meeting at the highest level since the Pelosi visit to Taiwan. This could be seen as reducing tensions between the two countries? However, at the same time the US is working to establish bases for its military access in the Philippines. At EPM we analyse geopolitics based on the view that “actions speak louder than words”.
BP’s “beefing up” in preparation for a big push in offshore wind
An opinion piece explaining why the US plan to force developing countries to decarbonize similar to developed countries is both immoral and economically misguided
India’s newly announced decarbonization plan
China’s clarifications regarding the country’s plan to greatly increase coal fired power generation capacity, which confirms EPM’s earlier assessment that this new coal capacity is designed as a backup and is part of a broader energy security plan
Efforts to develop sodium ion and lithium sulfur battery cells that deliver a step change improvement in battery cell cost, bypass China’s control over supply chains, and trump its current lead in battery technology
The preparations in Germany for a “energy blackout” scenario this winter
General Energy News
OPEC on Monday cut its forecast for 2022 global oil demand growth for a fifth time since April and further trimmed next year’s figure. It cited mounting economic challenges including high inflation and rising interest rates, reports Reuters. Oil demand in 2022 will increase by 2.55 million barrels per day (bpd), or 2.6%, the Organization of the Petroleum Exporting Countries (OPEC) said in a monthly report, down 100,000 bpd from the previous forecast. Next year, OPEC expects oil demand to rise by 2.24 million bpd, also 100,000 bpd lower than previously forecast.
At the same time, the International Energy Agency (IEA) says Russia’s production could fall to below 10 million barrels per day, if it fails to o find new markets for its oil once the US price cap and new European sanctions kick in over December, reports Bloomberg. This aligns to EPM’s outlook, which has been sharing with you ever since the US price cap plan was first introduced. We expect Russia to increase is discount December 2022 onwards, which China is most likely to respond to by buying more Russian crude oil, while India will maintain current levels of purchases so as not to upset the US too much. Shipping bottlenecks will prevent Russia from finding the new homes for its oil (Indonesia, Latin America, Africa ?) it needs to maintain production.
Macro-Economics
The world’s population reaches 8 billion people on Tuesday and will hit 9 billion in 15 years as it experiences an unprecedented surge in the number of older people, according to the latest UN data, writes The Financial Times. Demographics feature heavily in our EPM longer term outlook. Population growth, a key element in potential economic growth, is beyond peak already. Obviously, this will translate into slower economic growth going forward. The global population is also aging, especially in the developed world, Because “seniors” tend to consume significantly less than younger generations, this too will translate into slower economic growth going forward.
The Chinese government in May adopted an economic stimulus package that included deferrals on the principal and interest of bank loans for small and medium size enterprises. Now that the end of the year is approaching, at which time the loan deferrals will expire, the Chinese government is frantically searching for a way to protect these small and medium size enterprises, writes Nikkei Asia, because the economic problem for which the stimulus package was developed – a slow economy due to Zero Covid lockdowns – has not gone away. If anything, the situation has worsened. Reuters reports in this regard that China’s economy suffered a broad slowdown in October, with factory output growing more slowly than expected, retail sales falling (for the first time in five months) and property investment falling at its fastest pace since early 2020 in October. A solution for bad debt in the economy must be found, as otherwise a wave of bankruptcies will be triggered. At EPM we do not expect this worse-case scenario to materialize, as it would be too economically and, thus, politically damaging. Hence, the Chinese government will find a way to prevent it from happening.
Geopolitics
Joe Biden and Xi Jinping held their first face-to-face meeting as presidents of the US and China on Monday evening, on the sidelines of the G20 meeting in Indonesia, writes Nikkei Asia. Apparently, the meeting lasted over three hours, the focus of which was to restore the channels of dialogue that were cut with the Pelosi visit to Taiwan earlier in the year. To do this, each side first had to make clear where it stood on the sensitive issue. Biden set out in detail that America's “one China policy” – which acknowledges the Chinese view that there is but one China – has not changed, but that the US opposes any unilateral changes to the status quo by either side. Xi, for his part, said “the Taiwan question is at the very core of China’s core interests, the bedrock of the political foundation of China - US relations, and the first red line that must not be crossed in China-U.S. relations”. The summit is not expected to produce a joint statement or a detailed fact sheet of promises. Instead, EPM believes the aim of the meeting was to build a floor for the relationship and to make sure that the US-China competition does not spiral out of control into a conflict.
Meanwhile, the US and the Philippines are progressing talks on the Enhanced Defense Cooperation Agreement, writes Nikkei Asia. It would allow the US to use the Philippines as a forward base for its military, through giving US military personnel long-term access to at least five military bases. But the parties are also discussing new additional sites, including ones in the northern province of Cagayan, near Taiwan, and in the western provinces of Palawan and Zambales, which face the disputed South China Sea. In EPM’s view, this development is more indicative of the likely trajectory of the US – China relationship than talks between the two countries. In geopolitics, namely, actions speak louder than words, and all actions, from both sides, are either execution of economic or preparations for hot war.
Energy Transition & Technology News
BP is getting ready for a push in offshore wind, writes The Financial Times, after a series of new hires from industry rivals Orsted, Iberdrola and RWE since the start of the year.
Climate Politics
A Bloomberg opinion piece sets out the moral and economic case for allowing the developing world to increase emissions. The US climate envoy John Kerry wants all countries to reduce their emissions, irrespective of where they are on the development curve. At EPM this plan reminds us of the book “Kicking away the ladder” by the South Korean Cambridge economist Ha-Joon Chang, which documents how the developed world has been prescribing trade policies for the developing world that would make it impossible for the developing to follow the path toward development that the developed world itself has taken.
On the subject of developing countries and decarbonization, Reuters reports on India plan for long-term decarbonization, presented at COP27 on Monday. The country will “prioritize a phased transition to cleaner fuels” and “slash household consumption”, as well as deploying carbon capture, use and storage (CCUS) to achieve net zero emissions by 2070.
Chinese representatives at COP27 have clarified, once again, that the country’s plans to drastically increase coal fired power generation capacity does not mean an actual increase in coal based power generation, writes Reuters. Rather, the clarification confirms EPM’s assessment of the plan, that China’s plans around coal are part of a broader energy security strategy, under which the country has a diversified power generation system that minimizes its exposure to any one kind of power generation technology. Such that in normal situations it can run the system that is economically optimal considering the country’s decarbonization targets, but can switch between systems in times of disruption, to meet the continuous need for electricity.
The Electrification of Transport
US and European startups are racing to develop new batteries using two abundant, cheap materials, sodium and sulfur, to reduce China's battery dominance, ease looming supply bottlenecks and lead to mass-market electric vehicles (EVs), writes Reuters. If successful, the resulting sodium ion or lithium sulfur battery cells could be up to two-thirds cheaper than today’s lithium-ion cells. The EPM team has closely monitored battery developments since 2014; our position is that lithium ion battery technology will continue to deliver cost improvements and make EV manufacturing cost competitive with ICEV by around 2025; and, that thereafter the next step forward would be a step-change forward through a metallurgy innovation and improvements.
The Global Energy Crisis
German authorities are stepping up preparations for emergency cash deliveries in case of a blackout to keep the economy running, writes Reuters. Although German authorities have publicly played down the likelihood of a blackout, the discussions show both how seriously they take the threat and how they struggle to prepare for potential crippling power outages caused by soaring energy costs.