Energy Politics & Money - 16 May 2023
In this roundup, we take a closer look at the US strategy to win the competition with China. It centers around the formation of a global alliance to isolate China economically and militarily. The key take-away for investors, we at EPM believe, is that the efforts at economic isolation, which we in the past have also described as “regionalization of the global economy”, can cost the global economy up to 7% of gross domestic product, according to the IMF. And up to 12% for some countries, including the cost of technological decoupling. So if you might have been wondering why EPM spends a relatively large amount of time on geopolitics, now you know. Because unlike over the past 50 years, over the coming 50 years geopolitics will be one of the key wealth-creators and -destroyers.
Furthermore, we look at:
- The US Department of Energy announced start of the refill of the Strategic Petroleum Reserve (SPR), with 3 million barrels of sour crude oil; and its impact on crude oil prices
- “Lower than forecast” economic growth indicators from China; where EPM also discusses the reasons the country’s refining sector is nevertheless holding up
- The progress of the US diplomatic effort to keep the Pacific rim states firmly in its sphere of influence, as part of its confrontation of China
- One of the key challenges facing the energy transition, which is the buildup in supplies of the mined materials that will be needed to produce and deploy clean-energy technologies
- The debate that has resulted from Tesla's new vehicle-assembly system, the so-called unboxed process
General Energy News
The US Department of Energy (DOE) has announced that it will purchase up to 3 million barrels of sour crude oil, to start the refill of the Strategic Petroleum Reserve (SPR).
The announcement supported oil prices, writes Reuters. Brent crude futures climbed to $75.53 a barrel while UWTI was at $71.38.
Macroeconomics
As EPM mentioned yesterday, China's economic recovery has so far underperformed consensus forecasts. The country’s April industrial output and retail sales growth also were lower than forecast, writes Nikkei Asia, suggesting the economy lost further momentum at the start of the second quarter – adding pressure on policymakers to shore up a wobbly post-COVID recovery. Industrial output grew 5.6% in April from a year earlier, accelerating from the 3.9% pace seen in March, well below expectations for a 10.9% increase in a Reuters poll of analysts, although it marked the quickest growth rate since September 2022. Retail sales jumped 18.4%, speeding up sharply from a 10.6% increase in March for their fastest increase since March 2021. Analysts had expected retail sales to grow 21.0%. Investment in the property sector, a key pillar of the economy, tumbled 16.2% year-on-year last month after a 7.2% drop in March.
One of the few sectors of the economy that is still holding up is refining, writes Reuters. Total refinery throughput was 61.1 million tonnes in April, equivalent to 14.87 million barrels per day (bpd). April runs were slightly less than March levels, but that month broke all-time records. What is going for Chinese refiners right now is: access to cheap Russian crude, higher than usual export quotas, and increased domestic demand around the holiday season in China.
Geopolitics
India, Indonesia, South Korea, Brazil, Singapore and the Comoros – chair of the African Union – joined the Group of Seven finance meeting on Friday, as the major industrial nations seek help outside the bloc to lessen Chinese dominance of critical supply chains for clean technologies, writes Nikkei Asia. Heads of international organizations also took part in the talks, with the Organization for Economic Co-operation and Development (OECD) highlighting in a report that the G-7 pales in comparison to China over key stages in the manufacture of batteries, solar panels and wind turbines. Also present at the G-7 was the IMF, which during the conversations highlighted what we at EM believe is the key take-away for investors when it comes to the US – China competition, and the US strategy to win in this competition. The US is clearly intent on forming a global alliance to isolate China economically and militarily. The economic isolation, which we in the past have also described as “regionalization of the global economy”, can cost the global economy up to 7% of gross domestic product, says the IMF and up to 12% for some countries including the cost of technological decoupling.
We at EPM seem to have a completely opposite read of the geopolitical situation than Gideon Rahman of the Financial Times, it seems. According to him, our diagnosis of the situation, which happens to align with that of China, is wrong in three crucial respects. It misreads American intentions. It overstates the threat that US policies pose to China’s economy. And it underestimates the risks of confrontation with America. We respectfully disagree. Fundamentally, the way we at EPM see it, just like all hegemons before it, the US is trying to hold on to its position of hegemony. China is the one country in the world with the potential ability to wrest free from US dominance and control – it has the people, the money, is working to develop the technology, and translating it all into a military power that will be a match for the US’s. This, in essence, is the US reading of the situation, as evidenced by for example its most recent national security strategy. In history, hegemons always use three approaches to limit the rise of a competitor. First, diplomatic efforts to make it accept submission to the global order established by the hegemon. Second, if that doesn’t work, economic pressure, to force it to accept the existing global order. This is about isolation of the challenger through international alliances against it, to keep it “outside”, and about sanctions. Third, if that too doesn’t stop the rise of the potential challenger, war. This “natural response” by a hegemon by a challenger is well documented by all those who looked at the subject – from Graham Allison to Ray Dalio more recently. Based on the above, to say the US is not a threat to China’s economic rise is nonsensical. The US efforts to limit China’s access to semiconductor technology is designed to limits its rise. And so is the US effort to “friendshore” supply chains. Meanwhile, the extensive US diplomatic maneuvering that we have documented here at EPM is evidence that the US is practically preparing for war. Whether one describes these moves, the build of a global military alliance (QUAD, Japan, South Korea, Philippines, NATO) and the arming of the members of this alliance, as “defensive” doesn’t change the reality that they are preparations for war. Who will pull the first trigger is really irrelevant.
As to the US efforts preparations for war with China, yesterday it was Papua New Guinea, today it is Micronesia. The US will soon renew a key strategic pact with the latter country, Nikkei Asia writes, which is designed to “counter competition from China”. Soon the US hopes to deliver a similar agreement with Palau, US presidential envoy Joseph Yun said.
Energy Transition & Technology News
Energy Intelligence looks at one of the key challenges facing the energy transition, which is the buildup in supplies of the mined materials that will be needed to produce and deploy clean-energy technologies, such as wind turbines, solar panels and electric vehicles (EVs). An electric passenger car requires six times more minerals than a conventional gasoline car. Similarly, wind turbines, solar panels and expanded electricity grids that are needed to transport power, require a whole lot more minerals than their fossil fuel counterparts. This could result in an almost 40-fold growth in demand for some minerals required for battery storage from today’s level to 2050, and triple the demand for minerals used in low-carbon electricity generation. These critical minerals are similar in a way to oil and gas resources when looking at geographical concentration of production and processing capacities. The three largest lithium producing countries — Australia, Chile and China — account for nearly 90% of the global market, while 70% of global cobalt production comes from the Democratic Republic of Congo. The situation is worse when looking at the processing capacity of the minerals. A single country, China, dominates here, with 60% of lithium processing, 70% of cobalt processing, and as high as 90% for rare earth elements processing. Considering that the top three oil- and gas-producing countries together account for less than 45% of global production, there is a big risk that this geographical concentration of minerals may be used as geopolitical leverage, and create chokepoints in the global supply chain.
Climate Politics
The Electrification of Transport
Tesla's new vehicle-assembly system, the so-called unboxed process, has led industry analysts to debate whether it is radical, revisionist or derivative, or all of the above, writes Reuters. The new approach has resulted from Musk’s belief that the company needs to radically rethink conventional manufacturing methods in order to build more affordable - and profitable - electric vehicles in higher volumes. Lean gurus see key differences between the Toyota production way and Tesla's proposed overhaul. At its core, the Tesla method "is an assembly process" while Toyota has developed a far broader and more comprehensive "production management system" that helps automakers run assembly processes and related operations more efficiently. Several big questions loom: What sort of impact will Tesla's process have on the auto industry overall? Will it render useless the widely copied Toyota Production System? And can Musk actually make his company's process work as promised given Tesla's history of missed production deadlines and failed attempts to deploy unproven technology?
The Global Energy Crisis
Other