Energy, Politics & Money - 17 May 2023
In this roundup, we look at:
- The IEA belief that the current oil price downturn ignores a looming supply crunch later in the year
- The Bloomberg view that higher than anticipated supply from sanction countries is at the root of the current oil price weakness
- The plan for a second, multibillion-dollar public offering of Aramco
- The $17 billion UBS expects to lose from its take-over of Credit Suisse
- The George Friedman summary of the US diplomatic maneuverings in the Pacific that EPM has covered extensively: China’s difficulties in securing guaranteed access to the Pacific and its regional waters have now soared
- The EU decision to ban environmental claims based on carbon offsetting schemes, such as “CO2 neutral” or “carbon neutral”
General Energy News
The IEA says the current oil price downturn ignores a looming supply crunch later in the year, according to Reuters. "Prices were pressured lower by muted industrial activity and higher interest rates, which, combined have led to recessionary scenarios gaining traction," the Paris-based agency said in its monthly oil report. "The current market pessimism, however, stands in stark contrast to the tighter market balances we anticipate in the second half of the year, when demand is expected to eclipse supply by almost 2 million barrels per day (bpd)." The EPM view on the subject is that it all depends on one’s assumptions regarding the economic outlook. Do you expect a strong economic rebound during 2H2023, driven by China? Or do you foresee further economic weakness, due to inflation, high interest rates, and possibly further crisis in the banking sector? The IEA assumes the prior, because it believes high Chinese crude demand in March indicates a stronger-than-expected recovery. Yesterday EPM explained why we believe this does not read the Chinese economic situation correctly.
Javier Blas of Bloomberg believes the current weakness I oil prices is not due to weak demand, however. Instead, he says, it is due to “unanticipated production” from the sanctioned countries Russia, Iran and Venezuela. Put simply, he says, the black market for oil is booming. If one has the appetite – and the stomach – to buy crude from Moscow, Caracas or Tehran, the barrels are there, at a discount.
The Financial Times notes that indeed, as Javier Blas mentioned, Russia is exporting more oil than expected. In April, the number was higher than in any month since its full-scale invasion of Ukraine last year, with almost 80 per cent of crude shipments flowing to China and India, according to the International Energy Agency. Russian oil has also been trading at a discount to global benchmarks because of a G7-led price cap on permitted Russian exports of oil and refined petroleum products imposed in December and February respectively. However, that discount has begun to narrow, the IEA said, as Russia has increased its access to non-western shipping able to operate outside of the price caps.
Bloomberg says Saudi Arabia is planning for another multibillion-dollar public offering of Aramco. The kingdom has been working with several advisers to study the feasibility of a follow-on offering on the Riyadh exchange. Even a 1% offering would raise more than $20 billion, as the world’s largest energy company has a market value of roughly $2.1 trillion.
Macroeconomics
UBS expects a financial hit of about $17 billion from the takeover of Credit Suisse, the bank said in a presentation according to Reuters. UBS estimates a negative impact of $13 billion from fair value adjustments of the combined group's assets and liabilities. UBS also sees $4 billion in potential litigation and regulatory costs stemming from outflows.
Geopolitics
George Friedman of Geopolitical Futures summarizes the US diplomatic maneuverings in the Pacific that EPM has covered extensively. He says China’s main interest is free, uncontrolled access to the Pacific for its merchant and military fleets. Following the US deal with the Philippines, and the closer collaboration between US allies South Korea and Japan, China’s difficulties in securing guaranteed access to the Pacific and its regional waters have now soared. The ability of Japan and Taiwan to intercept Chinese naval movements, combined with the United States’ and Australia’s ability to block Chinese movement to the south, is a problem for Beijing. There is evidence that China understands the severity of the situation, Friedman says. President Xi Jinping recently moved Zhao Lijian – an official who came to embody China’s aggressive and confrontational wolf warrior diplomacy – from a spokesman role to head of the Foreign Ministry’s Boundary and Ocean Affairs Department. This will herald a significant, if not radical, shift in Chinese foreign policy.
Energy Transition & Technology News
A consortium of public- and private-sector groups in Japan will invest in a startup working to commercialize fusion power, writes Nikkei Asia. Sixteen companies, including Mitsubishi, Kansai Electric Power, and a government-affiliated fund will invest around 10 billion yen ($73.6 million) in Tokyo-based Kyoto Fusioneering, a startup born at Kyoto University. Kyoto Fusioneering employs advanced plasma-heating equipment called gyrotrons. These are key components for creating nuclear fusion reactions and the company is a world leader in their development. The startup will use the funds raised initially to establish technology enabling stable operation of a fusion reactor. In 2024, a small-scale experimental fusion reactor plant will be built in Japan to determine whether gyrotrons and other devices can perform over extended periods.
Climate Politics
The United Arab Emirates’ approach to the Cop28 climate summit it will preside over in November is “very dangerous” and a “direct threat to the survival of vulnerable nations”, according to the UN’s former climate chief Christiana Figueres, according to the Guardian. In summary, the UAE approach is to focus on carbon capture, to enable continued flows of fossil energy, while in parallel focusing on the build out of non-fossil based energy solutions.
The UAE argument is that this is the only realistic way to achieve energy access, affordability and sustainability. It believes other approaches, such as the focus on removing fossils from the energy equation as soon as possible, might support sustainability, but at the expense of either energy accessibility, affordability, or, or both. Figueres disagrees and clearly is in the camp of those who believe fossils need to be phased out as quickly as possible. “We do not have CCS commercially available and viable over the next five to seven years. It’s just not going to happen. We have an issue of timing here, in addition to a moral issue.” This is actually an opinion that we at EPM agree with – CCUS is greatly hyped and will consequently greatly disappoint. But, and there’s the irony in the EPM view, the exact same thing can be said about almost all non-fossil based energy solutions – renewables, biofuels, hydrogen. None of them have the ability to provide the energy access, affordably, that the world needs in the short- to medium-term. Renewables require a massive buildout, while at the same time transportation and industry would need to electrify, both of which are massive undertakings. Biofuels require a feedstock of which there simply isn’t enough. Hydrogen is 99% hype. So what’s our EPM conclusion? There will not be the energy transition that many envisage. The bulk of the current energy system will remain in place for the next 20 to 30 years at least. The additions to the energy system will be primarily non-fossil. What this will mean for climate change is obvious.
The European Parliament voted late last week to support new rules to combat greenwashing, writes EDIE. Crucially, it will only be possible to use sustainability labels based on official certification schemes recognised or established by public authorities. Additionally, the directive bans the use of generic environmental claims such as ‘environmentally friendly’, ‘natural’, ‘biodegradable’ or ‘eco’ if they are not supported by evidence. Other misleading practices, such as making green claims about the whole product when only one part is sustainable, will also be forbidden.
The Electrification of Transport
The Global Energy Crisis
Other