Energy, Politics & Money - 16 March 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
In this roundup, EPM takes a look at:
The impact of the financial market crisis on crude oil prices
The EU plan to impose curbs on imports of Chinese green technologies
The Goldman Sachs analysis of China’s likely trajectory in renewable energy: $8 trillion in investment until 2040, to transform to a truly renewables based system, including storage to ensure around-the-clock electricity provision, at lower costs than conventional starting 2030
The outlook for Sustainable Aviation Fuels (SAF), which is hindered by high costs and limited feedstock supplies
The debate as to whether the 1.5 C degree climate target should be maintained, or whether the focus should be shifted to adaptation efforts
Volkswagen’s ID. 2all concept car, which is to cost less than €25,000 ($26,400) and should be available by 2025
EPM takes a deep dive to look more closely at the unrest on the financial markets, but in the broader context you expect from us.
We fear what a collapse of Credit Suisse would do to the global economy. Very likely, it would cause financial chaos akin to the 2008 Global Financial Crisis. While governments and central banks at that time struggled to contain the damage, this time round we believe they would not be able to in the long run. Why?
Debt levels globally are now so much higher.
Public sentiment is now so much more against using public money to bailout bankers.
Even if the Bank is kept afloat, it will most likely come at the expense of monetary policy targeting the pressing issue of inflation.
Already most traders on the financial market trading floors believe the FED and ECB will pause interest rate hikes, while the FED’s emergency loan program related limiting the damage from SVB may inject as much as $2 trillion of funds into the US banking system, offsetting most of the monetary tightening of recent months to fight inflation. While that is good for banks, it is of course not good for inflation, and we wonder what impact this will have on the political economy – social unrest is quite likely as living standards erode.
General Energy News
Oil prices have been severely affected by the crisis on the financial markets, which EPM covers under Macroeconomics. WTI dropped under $70 on Wednesday, for the first time since 2021. There was a slight recovery during early trading on Thursday, Reuters reports, with Brent crude futures rising 85 cents, or 1.2%, to $74.54 per barrel and WTI rising 74 cents, or 1.1%, to $68.35 a barrel. But nevertheless, Brent has lost nearly 10% since last Friday’s close, while WTI is down about 11%.
Bloomberg notes that this is happening while Chinese oil demand is on the up following the ending of its Zero Covid policies (global oil demand is set for a boost from resumed air travel, the International Energy Agency said on Wednesday, according to Reuters), and supplies are disrupted by sanctions on Russia, Iran and Venezuela. It’s takeaway from this is that the power of the financial markets, when it develops its herd mentality, is stronger than that of actual physical supply & demand – which can not come to a surprise to anyone, of course. Our EPM view is, therefore, that unless the financial market fears turn into a real crisis via a CS collapse, oil prices should be expected to rise from current levels.
Macroeconomics
Reuters has summarized the overnight developments in the financial markets. Highlighted are the troubles facing Credit Suisse (CS), one of Europe’s (and the world’s) systemically important banks, a collapse of which would be a real “Lehman moment”. The bank has been struggling for longer, and the SVB crisis seems to have given it that “last little push” over the edge. Shares in the company crashed again on Wednesday (see below), and Reuters reports its largest shareholder, the Saudi National Bank (SNB), has announced it would not increase its shareholding to halt the decline. The threat of a CS collapse is now so real that the European Central Bank has contacted banks in the region for information on their exposure to CS, Reuters reports. In response, the Swiss central bank has provided CS an additional loan facility of 50 billion Swiss francs ($54 billion), Reuters reports. This makes CS the first major global bank to be given an emergency lifeline since the 2008 financial crisis. Nouriel Roubini is of the opinion CS is “Too big to fail and too big to be saved”, he said on Twitter.
When we at EPM consider the subject in a broader context, firstly, we fear what a collapse of CS would do to the global economy. Very likely, it would cause financial chaos akin to the 2008 Global Financial Crisis. While governments and central banks at that time struggled to contain the damage, this time round we believe they would not be able to. For one, because debt levels globally are now so much higher. For another, because public sentiment is now so much more against using public money to bailout bankers. Secondly, even if CS is kept afloat, it will most likely come at the expense of monetary policy targeting the pressing issue of inflation. Already most on the financial markets’ trading floors believe interest rate hikes will be paused by the Fed and the ECB (there is even an increasing interest in bets that the Fed will lower rates again this year, writes the Financial Times). In addition, just the Fed’s emergency loan program related to SVB may inject as much as $2 trillion of funds into the US banking system, writes Bloomberg, offsetting most of the monetary tightening of recent months to fight inflation. While that is good for banks, it is of course not good for inflation, and we wonder what impact this will have on the political economy – social unrest is quite likely as living standards erode.
Geopolitics
The EU is to impose curbs on imports of Chinese green technologies, demoting bidders for public contracts and making it harder for buyers to access subsidies, writes the Financial Times. Under a draft of the Net Zero Industry Act, public procurement bids using products from a country with more than 65 per cent EU market share would be downgraded. Similar rules would apply to any government programme subsidising consumer purchases. “China is a prime example,” said a person familiar with the plans. The FT sees the move as evidence the EU “inches closers to the US’s tough stance on (China’s) communist regime”.
Energy Transition & Technology News
China is likely to install nearly three times more wind turbines and solar panels by 2030 than it’s current target, Bloomberg writes based on a Goldman Sachs report. Falling costs will make solar and wind capacity reach 3,300 gigawatts by 2030, well ahead of the government’s target of 1,200 gigawatts. Such a vast fleet of intermittent generation will require about 520 gigawatts of energy storage to ensure around-the-clock electricity provision, around 410 gigawatts of which would come from batteries and the rest from pumped hydro facilities. That means battery storage capacity would be 70 times higher than the level seen at the end of 2021. All this requires about $8 trillion of investment through 2040, but will lead to lower, and less volatile, generation costs from 2030.
The reality is that flying planes on sustainable aviation fuel—known as SAF—faces big hurdles, writes the Wall Street Journal. Many airlines, corporate flyers and governments see sustainable aviation fuel—chemically similar jet fuel refined from biological waste rather than crude—as a way to reduce aviation’s contribution to global warming. It can cut emissions by up to 80% compared with conventional jet fuel, depending on the feed stock used. At least 30 airlines have promised to use SAF, usually for 10% of their fuel consumption, by 2030. However, the sustainably derived fuel is typically two to four times as expensive as conventional jet fuel. Additionally, production capacity for SAF is projected to rise to around 860 million gallons in 2023 and 1.51 billion gallons in 2024 – a tenth of the 100 billion gallons needed to fly the world’s planes. The biological feed stocks needed to increase production are just not available, and what is available is also being pulled in for production of renewable diesel and marine fuels.
Climate Politics
As the Paris Agreement goal for limiting global warming to 1.5 degrees appears increasingly unachievable, some are calling for a rethink of priorities, writes the Financial Times. Sultan al-Jaber, chief executive of Abu Dhabi’s state oil company and president of the UN COP28 climate summit, has said that the goal of limiting temperature rises to 1.5C “is just non-negotiable”. But business figures — including some of Jaber’s peers in the hydrocarbon industry — are starting to argue in private that it would be better to put more emphasis on planning for a world with warmer temperatures than to focus on what is now likely to be an unachievable goal. Bill Gates, for eample, whose investment firm Breakthrough Energy invests in climate change innovations, has repeatedly said the 1.5C target is not achievable any longer. He argues that as well as trying to limit warming, we will need to prepare for a hotter world.
The Electrification of Transport
Volkswagen has unveiled an affordable electric vehicle, reports Bloomberg. The compact ID. 2all concept previews a car costing less than €25,000 ($26,400) that VW is readying for the European market in 2025. VW said the EV will be as spacious as the Golf and as inexpensive as the Polo.