Energy, Politics & Money - 16 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money news feed for Tuesday 16 August, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we look at:
Pressures responsible for lowering crude oil prices
Continued fears of what continued sabre-rattling means for the Taiwan crisis
Hydrogen is playing catch up in China
Norway will need to shut old carbon producing fields to meet 2030 emission targets
The EU changes its mind on minerals needed for EVs and the heating Indian EV market
How one EU nation is rationing energy supplies and Germany expects societal upheaval if energy is rationed this winter
And, much more.
General Energy News
The oil price dropped further during trading on Monday, according to The Guardian because traders are caught up with some of the events we’ve discussed extensively here on EPM - namely the impact of China’s Zero Covid policy on economic growth and its real estate issues. How so? Brent crude futures settled down $3.05 ( -3.1%) to $95.10 a barrel, while WTI settled down $2.68 (-2.9%) at $89.41 according to Reuters. The consensus on what triggered these drops is the move by China’s central bank to cut interest rates - for the second time this year - after posting disappointing figures for official economic growth. For the general market this was unexpected, but not for the followers of EPM. We said at the beginning of our coverage of China’s real estate challenges, the Chinese government would not allow this challenge to lead to a Lehman-like implosion of the economy and was thus likely to further inflate the bubble through providing the market with more cheap debt.
The Macro Environment (economics & geopolitics)
On the geopolitical front, yesterday we reported on the latest visit of US lawmakers to Taiwan. As was to be expected following Pelosi’s visit, the latest visit further angered the Chinese. In response, Reuters reports China's military carried out more exercises near Taiwan. Meanwhile, the Chinese defense ministry sent this communication “The Chinese People's Liberation Army continues to train and prepare for war, resolutely defends national sovereignty and territorial integrity, and will resolutely crush any form of 'Taiwan independence' separatism and foreign interference.” The statements “prepare for war” and “resolutely crush” are, of course, strongly worded phrases by diplomatic standards. They indicate, that while the current trajectory of China-US interactions continue, the involved parties are likely headed for war.
In our view, any war over Taiwan will escalate very quickly into a regional conflict. This is indicated, among other ways, by increased US military drills - including Minuteman III tests - off the coast of Hawaii as reported on by Reuters. According to the Pentagon these drills included North Korea as well as China. Therefore, it is not surprising that South Korea and Japan participated in these ballistic missile defense exercises. Nikkei Asia also reports that Japan's Self-Defense Forces have participated in 50% more joint exercises with the U.S. military so far this year than in the same period of 2021 as the partners strengthen deterrence on the front lines of a potential conflict around Taiwan.
Energy Transition & Technology News
According to the people interviewed by Reuters, the tax credits included in the $430 billion U.S. climate and tax bill will kick start carbon sequestration projects.
S&P Global reports that the Chinese provincial Government of Guangdong announced plans on 12 August to establish 200 hydrogen refueling stations - to support the 10,000 hydrogen fuel cell vehicles (FCEVs) already on road - will offer 100,000 mt/year of hydrogen supplies by 2025. While this sounds ambitious and will delight hydrogen fans, we at EPM recommend that this development be put into context.
By 2025, how many battery EVs will be on the roads of Guangdong and how many public charging points will be available to these EVs by then? Our key point is that even if one were to assume hydrogen is a better low carbon transportation solution than battery electric - we see the facts as disagreeing - by the time hydrogen gets ready to launch, EVs will be mainstream. And, considering the costs involved in changing the transportation system, we have zero confidence in a scenario in which the transportation fueling system is changed twice within a decade (from oil to battery to hydrogen). The first to achieve critical mass will win and the ways things are going now, that first is going to be battery EVs.
Climate Politics
According to a Reuters report, Norway’s Climate Minister Espen Barth Eide said that in order for Norway to achieve its 2030 climate goals it will need to prematurely phase out some of its old oil and gas fields. Unless, it can increase the use carbon-free power on more offshore platforms to cut their emissions. We note that Norway already uses renewables to power operations for the Johan Sverdrup field. Hopefully, it will choose to roll this out at other fields as well, rather than opting to shut them in, because Europe will need all the fossil energy it can get its hands on until at least 2030.
Not too long ago, the European mining industry warned the EU that its ambition to label lithium as a ‘toxic substance’ would not support it’s ambition to grow “local supplies” of the critical mineral. It seems they’re listening - according to The Financial Times reports the European Commission plans to lower regulatory barriers to mining and production of critical materials such as lithium, cobalt, and graphite which are all needed for wind farms, solar panels and electric vehicles.
The Electrification of Transport
A few weeks back we covered the ambitions of Indian companies focused on major players in electrified transportation. According to Bloomberg, one of these companies, Mahindra recently announced its ambition to launch five UK designed electric sports utility vehicles (SUV). The first of the Mahindra’s e-SUVs will be launched by the end of 2024 for the Indian market while other three should be out by 2026.
ESG
Nikkei Asia carried an opinion piece looking at the state of ESG in Asia. It says that as of the end of 2021, 86% of regional companies had already set net-zero targets or intended to do so over the next 12 months. This is due to the fact that in the Asian business climate ESG has also become a nonnegotiable requirement.
The Global Energy Crisis
Kosovo is the first country in Europe in which the lights will go out because of the Global Energy Crisis. The Guardian reports it has stopped importing electricity because it simply can’t afford it at current prices. But, domestic generation capacity - almost all of which comes from coal-fired power stations - can only meet around two-thirds of demand. Consequently, it has been forced to ration energy with consumers being told they will now only be allowed six hours of power at a time punctuated by two-hour breaks (we hope that this is not the case for medical, emergency, and military services).
In Germany officials have started to think through the resulting impacts if they are forced to implement similar measures over the coming winter. ZeroHedge has summarized these discussions in the German media (Suddeutsche Zeitung, Welt am Sonntag, ZDF). Apparently, officials are bracing for protests over “gas shortages, energy problems, supply difficulties, possible recession, unemployment, but also the growing poverty right up to the middle class”. A security service official said “We're likely to be confronted with mass protests and riots. We’re dealing with a highly emotionalized, aggressive, future-pessimistic mood in society, whose trust in the state, its institutions and political actors is fraught with massive doubts. This highly emotional and explosive mood could easily escalate.” We at EPM wonder how steadfast German support for Russian sanctions will be when the energy cuts start hitting the home front?
Over at Reuters a Factbox - illustrating what European governments - country-by-country - have implemented to shield consumers from the energy price rises caused by the economic war between Europe and Russia. We doubt that any of it will be enough to prevent the kind of social upheaval feared by Germany if, indeed, energy rationing is implemented.
Other
Reuters has a good piece explaining China’s management of refined fuel exports. In short, the country does not want to create an export oriented refining industry, similar to the US Gulf Coast, as it does not want to burdened by the emissions this causes. So, it is designing a top-quality refining industry at exactly the size needed by China’s domestic economy. The Chinese government manages exports of gasoline, diesel, and jet fuel using a quota system and issues several batches of allocations over a year. It reviews product shipments to global markets to manage domestic supply and demand balances. Most quotas are destined for state oil groups such as China National Petroleum Corp, China Petrochemical Corp, China National Offshore Oil Corp, Sinochem Holdings and China National Aviation Fuel Company. Mega refiner Zhejiang Petrochemical Corp is the only private company assigned export allowances. Since 2019 Beijing has steadily reduced export quotas to pressure un-economic refiners and force the least competitive ones out of business. Of course, this is good for refiners in South Korea, India, and, possibly Japan, as it keeps Asian import markets such as Indonesia wide open for their products.