Energy, Politics & Money - 17 January 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
EPM examines the current situation in the oil market, which appear to have stabilized based on the hope that monetary policy will become more lose over coming months and China will be able to leave the current COVID wave behind it
In this roundup, we also look at:
The Financial Times review of the US Shale industry, which does not provide many new insights but reaffirms what (most) already knew, namely that while US Shale has given the US “strategic independence”, as it now need not worry as much about energy supplies, the global economy will need to look elsewhere for supplies that can meet demand growth
The change in crude oil flows caused by the sanctions on Russia, not just between regions but also within regions
The decline in China’s population and what this will mean for the future of economics, politics and money
A review of Japan’s new military strategy, from the Chinese perspective
China’s near monopoly in the supply chain for renewable energy technology, how this is being responded to internationally, and what this means for the energy transition
The focus of Japanese R&D when it comes to the energy transition, which is solid state batteries and artificial photosynthesis
Western Australia’s hydrogen plans, the execution of which could offer valuable lessons for the industry globally
General Energy News
John Kemp of Reuters looked at the futures market for crude oil and refined petroleum products, and concludes the bullishness about petroleum prices that flooded parts of the investment community at the end of 2022, has ebbed in the first full week of 2023 as concerns continue to mount over the global economy and China's coronavirus wave.
This explains the drop in oil prices from around $86 per barrel (Brent) at the end of 2022 to a low of around $78 per barrel after the first week of January 2023. For now, Brent seems steady at around $84 per barrel reports Bloomberg. Concerns over a global recession continue to exist, but there is hope that the US Fed will slow down monetary tightening, or even reverse it, and that China’s economic growth will return to normal over coming months as the current COVID wave ends.
The Financial Times carries an analysis of the US Shale industry and concludes the era of aggressive growth is over. High costs and labour shortages are now major worries for operators whose access to capital has been severely curtailed by Wall Street as it wants profits paid back to investors and not reinvested in production growth. While this has given the US “strategic independence” because it does not now need to worry as much about energy supplies. It also means the global economy will need to look elsewhere for supplies that can meet demand growth.
Also interesting is a report by S&P Global which says that as India became the largest buyer of Russian crude in late 2022 and China posted close to double-digit growth in Russian inflows over January-November 2022, it noted that refiners in South Korea, Japan and Thailand found it easier to procure term and spot crude supplies from Middle Eastern producers.
Macroeconomics
As you know, the EPM perspective on the medium- to longer-term macroenvironment is based on three fundamental drivers: a declining population in the mature economies of the world; regionalization of the global economy; and, tightening monetary policy. As to the first of these, Nikkei Asia writes China’s population shrank last year for the first time since the early 1960s. Data released by the National Bureau of Statistics showed China’s population stood at 1.41175 billion in 2022. The birthrate was the lowest on record and the death rate the highest since 1976. The natural population growth rate was a negative 0.6 per thousand representing steep slide from 2021’s 0.34. The view that “Because China’s demographic crisis is beyond imagination, China’s political economy, defense, and diplomacy will undergo a significant transformation”, is one that we at EPM agree with.
Further in China, the country has taken another measure to prevent a short-term collapse of its real estate market. It will let certain cities cut mortgage rate floors below the central government’s minimum thereby making permanent a previously temporary measure to curb the slump in the housing market writes Nikkei Asia. The EPM perspective on this is that it is aligned with our earlier forecast regarding China’s real estate market, namely that the Chinese government will not allow an uncontrolled implosion, and is willing to further inflate the bubble to prevent that from happening in the short term.
Geopolitics
An opinion piece in Nikkei Asia states Japan’s new National Security Strategy marks a paradigm shift because it will see defense spending rise to 2% of Japan’s gross domestic product (GDP) and establish significant counter strike capability. The justification given for this fundamental shift is a changed security environment, in which China’s rise is perceived to pose the “greatest strategic challenge ever” to Japan. The author of the piece looks at the subject from the Chinese perspective, and says this stance will not be helpful for Sino-Japanese relations. He notes it creates a mismatch in Japan’s security and economic interests toward China – which, we at EPM note, is a problem Germany grapples with at present. The promised military buildup, especially in terms of offensive capability, will not only strengthen the US-Japan alliance vis-a-vis China but will reinforce US military dominance in the Indo-Pacific region.
For this reason the US has hailed the strategy, also because it will weld Tokyo closer into the US-led regional security architecture by increasing Japan’s dependence on Washington for weapon supplies, training and intelligence. Yet, he says, China will not react, knowing that the strategy does not reflect a strategic consensus due to the differences among Japan’s policymakers as well as the general public. It is expected that while the strategy is transformed into concrete policies, domestic opposition will be substantial. So China will bide its time.
Lastly, the author warns Japan should realize that its interests in the region and beyond will not always converge geopolitically and economically with those of the US. And that the likely response in the region, i.e. a China-Russia coalition against Japan, would be a security nightmare for Tokyo.
Energy Transition & Technology News
The supply chain for renewable energy technology is even more concentrated than for fossil fuels – and its predominantly in the hands of China, writes The Wall Street Journal. Quoting numbers from the IEA, it says China refines 95% of the world’s supply of cobalt, a metal used in lithium-ion batteries; manufactures over 70% of sicilia-based solar photovoltaic modules; and is home to three-quarters of global electric-vehicle battery production capacity. It is the result of policy, including years of subsidies, access to cheap power, labor and land.
The Chinese government first identified clean energy as strategically important more than a decade ago. As a result, between 2018 and 2022, Beijing’s share of global investment in new factories for clean-energy products such as solar panels and wind turbine components held steady at 80%. In the EPM view, this current reality explains the US’s Inflation Reduction Act, which offers subsidies for relocating energy transition manufacturing capacity to the US. In the current geopolitical reality, more countries will put in efforts to end China’s monopoly position, but higher labor costs and energy bills mean the relocated companies and industries will be more expensive – which explains why consider the regionalization of the global economy to be inflationary.
When it comes to the energy transition, Japanese scientist engineers are focusing on solid-state batteries and artificial photosynthesis writes Nikkei Asia as lithium-ion batteries approach their limits in terms of performance. Japanese R&D is focusing on overcoming the problem of capacity loss that occurs after repeated cycles of charging and discharging of solid-state batteries. While on artificial photosynthesis, the breakdown of water into hydrogen either through using a solar cell to split water by electrolysis or through harnessing light for the reaction directly with a photocatalyst, the focus is on increasing overall energy efficiency.
Wind turbine manufacturer Vestas believes the industry’s focus over coming years will not be on growing the size of the turbines, but rather on efficiencies and expanding output to meet demand, writes Bloomberg.
The state of Western Australia, currently accounting for more than half of Australia’s total LNG exports, is planning an extensive build-out of hydrogen infrastructure to become a key producer of the new fuel, writes S&P Global. Its masterplan aligns with the national strategy to become a global hydrogen superpower, and the rollout will be of special interest for several reasons, it says. Western Australia will be a case study for other major global LNG producers like Qatar, Indonesia, Malaysia and the US who are looking to use existing natural gas infrastructure and the broader hydrocarbon ecosystem as a launch pad to build a hydrogen economy. The hydrogen rollout will also test regulatory preparedness and how effectively E&P policies for extractive industries can be adapted for hydrogen projects. Controversial provisions such as domestic content regulations and reserving energy supply for local use; as well as test the financing ecosystem for new hydrogen technologies and the availability of resources and manpower; and establish hydrogen marketing and pricing principles will be examined.