Energy, Politics & Money - 17 July 2023
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we look at:
The weak Chinese economic growth during the second quarter of the year
The growing awareness that Germany’s policy decisions regarding Russian energy and the US – China geostrategic competition, is leading it down a path that ends in de-industrialization
The view that if NATO starts extending its reach into the Indo-Pacific, geopolitical tensions in the region can only escalate
Germany’s new “China Strategy”, which closely follows the US narrative regarding China, and therefore upsets China, and provides guidance as to Germany economic potential in the current geopolitical climate
ExxonMobil’s acquisition of CCS (Carbon Capture and Storage) company Denbury - specializing in the use of carbon dioxide to extract oil from old wells - and providing ExxonMobil access to the largest carbon dioxide pipeline network in the United States
Solar farms out at sea, which is deemed “clean energy’s next breakthrough”
The Saudi Arabian and Japanese collaboration on energy transition
Shell’s consideration of divesting its power business
Sultan Al Jaber’s vision for the upcoming COP28 summit in the United Arab Emirates
The explicit comment by US climate envoy John Kerry that his country will not "under any circumstances" pay reparations to developing countries hit by climate change fueled disasters
An analysis of why the recent Summit for a New Global Financing Pact in Paris, France, failed to deliver anything meaningful
Tesla’s first cybertruck
The defeat of fuel cell technology in the competition with pure battery technology for the hearts and minds of consumers in China
General Energy News
It’s still far from clear whether Brent crude’s recent return to $80 a barrel is a turning point that heralds a major price rally, writes Bloomberg. Economic storm clouds still darken the horizon, from shaky Chinese indicators to rising interest rates, and barrels of cut-price crude continue to flood from Iran and Russia. But what it has achieved, Bloomberg says, it provide oil a firm floor.
Macroeconomics
China’s economy lost momentum in the second quarter, with gross domestic product expanding 0.8 per cent against the previous three months as exports fell, retail sales were weak, and a moribund property sector writes the Financial Times. The National Bureau of Statistics said “generally speaking”, economic development had “fully returned to normal” in the first half of the year. “However, we must be aware that the international political and economic circumstance is quite complicated, and the foundation for sustained recovery at home is not solid yet,” it added.
A perfect storm is brewing over Germany, writes Politico, signaling that its current recession isn’t just “technical,” as policymakers pray, but rather a harbinger of a fundamental reversal in economic fortunes that threatens to send tremors across Europe. Confronted by a toxic cocktail of high energy costs, worker shortages and reams of red tape, many of Germany’s biggest companies — from giants like Volkswagen and Siemens to a host of lesser-known, smaller ones — are experiencing a rude awakening and scrambling for greener pastures in North America and Asia. Absent an unexpected turnaround, it’s hard to avoid the conclusion that Germany is headed for a much deeper economic decline. As you know, this view, that Germany’s policy decisions regarding Russian energy and the US – China geostrategic competition, is leading it down a path that ends in de-industrialization, has been EPM’s base case view since the start of the Ukraine War.
Geopolitics
A response in the South China Morning Post to the NATO communique says that if the military alliance starts extending its reach into the Indo-Pacific, tensions can only escalate. In December 2019, China was acknowledged in a NATO communique for the first time, marking a major shift in the military alliance’s recognition of China’s strategic significance. This was the initial step in NATO’s official evolving stance on China, and subsequent months saw a progressive increase in its references to China, which were accompanied by a more assertive tone. At the 2021 summit in Brussels, the NATO communique explicitly sounded the alarm, cautioning that China’s “stated ambitions and assertive conduct” posed systemic challenges to the rules-based international order and to areas directly affecting the security of the alliance. The blunt language used to describe China in the final Vilnius communique left no room for doubt that the US and its allies are now trying to engage China in a new cold war. While Nato’s attempt to establish a liaison office in Tokyo have not materialised, NATO might well pursue alternative approaches to assert its presence in the Asia-Pacific, including fostering substantial bilateral relations with its designated regional partners and even, potentially engaging in joint military operations. For obvious reasons, such developments should be expected to attract a military response from China.
A similar sentiment is echoed in Responsible Statecraft, which also says NATO expansion into the Indo-Pacific, a region the United States deems vital to its security and prosperity, increases the chances of conflict. A better way forward for the US would be to strengthening regional alliances, it says, while avoiding the formalization of a multilateral defense alliances. The United States could encourage its regional allies to take the lead in developing their defensive capabilities and rely on them to contain China. In the EPM view, this is already the case.
Further regarding China, Germany last Thursday released an update of its “China Strategy”. “China has changed. As a result of this and China’s political decisions, we need to change our approach to China,” says the document, according to the South China Morning Post, which describes it as a flagship foreign policy issue for Foreign Minister Annalena Baerbock. It says the 40-page document lays out a “cold and scathing” view of today’s China and its intentions, marking a break from an era in which bilateral ties and trade blossomed under former chancellor Angela Merkel.
According to the document, on the economic front, Germany has thrown its support behind the European Union’s de-risking policy but made clear it is not interested in decoupling. “It is not our intention to impede China’s economic progress and development. At the same time, de-risking is urgently needed. However, we are not pursuing a decoupling of our economies”. Amid heated debate about what European de-risking will look like, the German version promotes building up Europe’s own industrial base and seeking trade deals with alternative partners. Germany is also expected to seek ways to protect its own competitive advantages. In future, government export credit guarantees for deals in China will be predicated on whether they help fuel domestic repression, the potential for technology transfer to Chinese partners and whether they deepen existing imbalances. Companies trading with China will be expected to carry out their own de-risking, and the report warned that the government will not bail out those that fail to address “concentration risks … in the event of a geopolitical crisis”.
On the security front, Germany made clear that China’s cosy ties with Russia would affect relations, and warned Beijing against providing arms to support the invasion of Ukraine. In a harbinger of what the reaction from Beijing will be, China’s top foreign ministry official for Europe, Wang Lutong, tweeted that “Germany now faces many challenges and it’s important to address the root causes. But one thing is for sure: none of the problems are caused by China”.
EPM notes that the document clearly follows the US narrative and framing regarding China (another example is the document naming China a “systemic rival”, which is nonsense from the German perspective, as it only makes sense from a US perspective that is at the heart of the current system). This indicates, once again, the weakness of strategic thinking in Germany, and much of the broader EU. The result? Germany is simply not able at the moment to plot a course for the country across the current geopolitical landscape to protect and serve its own interests. As long as Germany follows the narrative of another country – be it the US or China – it will unavoidable sacrifice its interests for the interests of that other country. This is what investors should consider when evaluating Germany’s economic potential.
On the same subject of Germany’s new China Strategy, Nikkei Asia has a different view. It says the document lists Germany’s grievances, because Germany seeks cooperation with China. At EPM we believe that even that that was Germany’s intention with the document (we doubt it), it is very unlikely China will see it that way – which is what really matters! In response, the Chinese embassy in Berlin issued a statement saying that the challenges Germany faces are not created by China. "China is Germany's partner in facing its challenges, not its rival," according to the statement, which also mentioned that viewing China as an ideological adversary will only lead to misunderstandings and misjudgments, "hurt mutual cooperation and trust."
Lastly on China, US Treasury secretary Janet Yellen has confirmed the EPM view that there will not be a breakthrough in US – China relations anytime soon. Our view is that China wants the US to show willingness to backtrack on some of the economic or military measures it has taken against China over recent years. And we believe the US will not. Speaking ahead of a meeting of Group of 20 finance ministers and central bankers in India, she said the US sees it as “premature” to relax trade restrictions, according to the Financial Times. “The tariffs were put in place because we had concern with unfair trade practices on China’s side and our concerns with those practices remain. They really have not been addressed and China put in place retaliatory tariffs of its own,” she told reporters. “Perhaps over time this is an area where we could make progress, but I would say it’s premature to use this as an area for de-escalation, at least at this time.”
In an article for Middle East Eye, former Italian diplomat Marco Carnelos offers his (sobering) review of the key geostrategic subjects we at EPM also cover. He looks at the Wagner mutiny (“What the West got wrong”); the “turn-right” in European politics, and what it would mean of these outsider parties were to continue the “Atlanticist policies” of current European governments; China’s view on the “de-coupling versus de-risking” debate; and the (hidden) US policy regarding Ukraine.
Energy Transition & Technology News
ExxonMobil will buy CCS company Denbury in an all-stock transaction valued at $4.9 billion, writes CNBC. Denbury specializes in using carbon dioxide to extract oil from old wells. From the EPM perspective, at least as important for ExxonMobil, that is trying to build a “carbon-management-as-a-service” business, is the fact that the Denbury deal provides it with access to the largest carbon dioxide pipeline network in the United States. Under the terms of the deal, Denbury shareholders would get 0.84 Exxon shares for each Denbury share they hold.
Solar farms out at sea are clean energy’s next breakthrough, writes Bloomberg. It is an innovation that very much coming out of China, the analysis shows. Ocean-based solar arrays that can handle waves of up to four meters could be ready for commercial deployment within a year, and systems able to withstand 10-meter high swells will take at least three years to perfect. But developing panels at sea could be around 40% more expensive thanks to more complex installations and costly subsea cables, according to BloombergNEF estimates.
Japanese Prime Minister Fumio Kishida will visit Saudi Arabia on Sunday, and meet Crown Prince Mohammed bin Salman. Among the things they are expected to agree upon is development of blue ammonia for export to Japan, writes Nikkei Asia. Japan will provide assistance in the construction of an ammonia plant planned by Saudi Arabia's state-run oil giant Saudi Aramco, with trading houses Mitsubishi Corp. and Mitsui & Co. to take part as well. Saudi Aramco aims to produce as much as 11 million tonnes of ammonia a year by 2030 with the addition of the new plant. Another area where the two countries are expected to agree on collaboration is the mining of rare earth minerals, writes again Nikkei Asia. Under the deal, Japan and Saudi Arabia will explore resource development projects in third countries for joint investment.
Shell is exploring options for its global renewable power operations, including a potential stake sale to outside investors, writes Bloomberg. The deliberations come as Chief Executive Officer Wael Sawan focuses the company’s investments on fossil fuels in a bid to increase shareholder returns and narrow the valuation gap with Shell’s US peers.
Climate Politics
The chairman of COP28, Sultan Al Jaber, has laid out its vision for the upcoming summit in the United Arab Emirates. According to Reuters, the summit will aim to increase pressure on major emitters to update their actions to cut greenhouse gas emissions. Al Jaber said all governments should update their emissions-cutting targets by September, which the UAE did last month. Sultan al-Jaber said the summit should also yield international goals to triple renewable energy, and double energy savings and hydrogen production by 2030. A secondary objective will be to unlock more capital to tackle climate change, and Al Jaber called for a "comprehensive transformation" of international financial institutions to achieve this.
Al Jaber further said the COP28 summit will aim to establish a promised fund to compensate poorer countries where climate change is inflicting irreparable damage. But on this subject, the US has said it will not, "under any circumstances", pay reparations to developing countries hit by climate change-fuelled disasters, writes BBC. Climate envoy John Kerry made the remarks at a Congress hearing before flying to China to discuss the issue. At last year's conference, COP27 in Egypt, more than 200 countries agreed to create a loss and damage fund, which will be financed mainly by developed nations before the money is distributed to "particularly vulnerable" nations. Although the agreement was billed as one of the major successes of the summit, there are still many details that need to be ironed out, including how much richer nations will pay and how money will be distributed. Developing nations - which are disproportionately impacted by climate-related impacts - have called for guaranteed compensation from developing countries, who they say are historically responsible for climate change through their high emissions of greenhouse gases. In EPM’s view Kerry’s comment exposes the geo strategic maneuvering underlying the climate debate. Most countries involved in the debate try to further their own, national interest through it, rather than sincerely address the issue that has been caused by their past economic development.
An opinion piece over at Project Syndicate looks at why the recent Summit for a New Global Financing Pact in Paris, France, failed to deliver anything meaningful. It says, with more than 70 developing countries either in dire need of debt relief or already in default, global leaders offered no concrete proposals for improving the International Monetary Fund’s Global Sovereign Debt Roundtable or the G20’s Common Framework for Debt Treatments, both of which have not yielded the expected results. They also argue that while failing to meet their own obligations, global leaders overemphasized the private sector’s role. Although private investors control more than $210 trillion in financial assets, only a small fraction of this is invested in lower-income countries. Moreover, the financial sector’s predatory lending practices have increased the debt burdens of already-distressed countries across the developing world. (These issues were conspicuously absent from the discussions during the Paris summit, perhaps because Macron’s advisers included BlackRock and Amundi, two of the worst offenders, it notes.) A just transition to a low-carbon economy is the only way forward, but governments in the Global North are stalling, it concludes.
The Electrification of Transport
Almost four years after Elon Musk first unveiled Tesla Inc.’s debut pickup, the automaker has built its first Cybertruck, writes Bloomberg.
While in the passenger segment of transportation electric vehicle (EV) sales in China have exceeded 600,000 units in a month, sales of fuel cell vehicles (FCV) have come to a complete halt, writes Nikkei Asia. Not a single fuel cell passenger car was sold in China for six consecutive months through May, according to the China Association of Automobile Manufacturers. Commercial vehicles present an opportunity for growth, is now the hope. But in this area too, according to the China Association of Automobile Manufacturers about 300,000 commercial EVs were sold in 2022, 9.2% of all commercial vehicles. Fuel cell vehicle commercial sales were only 3,681 units, 0.1% of the total. In the EPM view, because China is the leading market when it comes to the electrification of transport, this is an insightful development. Despite generous subsidies from national and local governments, the hydrogen-based alternatives to the conventional internal combustion engine have failed to take off, because battery electric simply outperforms. This is the future, we believe.