Energy, Politics & Money - 18 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money view just for you!
Welcome to the Energy, Politics & Money news feed of Thursday 18 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we look at:
The €12.3 billion loss of Uniper due to its dependence on Russian energy
The stagnating front line in the Ukrainian conflict and the hope for a negotiated settlement
China’s economic news as it continues to impress
Singapore’s plan to import electricity to meet its Net Zero goals
The lobbying efforts to pass Biden’s climate bill
The EV ambitions of China’s BYD
The continuing energy crisis and its impact on consumers and business
General Energy News
Reuters reports that German gas utility Uniper has reported a loss of €12.3 billion (US 12.5 billion). Its business is dependent on Russian gas supplies. With drastic cuts it has had to secure replacement volumes at much higher prices on international (spot) markets. The company was nationalized by the German government last month in order to keep it afloat financially.
The Macro Environment (geopolitics & economics)
We have not discussed the Ukraine War for quite some time.
Not because the conflict ended but because nothing has happened that could significantly impact global energy markets – which is EPMs remit.
But now things are happening that are likely to directly impact global energy markets - although we at EPM acknowledge it is too early to say what this impact will be in the short- or medium-terms.
It is noted by several sources that the front line is becoming stagnant. Fighting continues and both sides are now well dug in, but, without additional resources, neither side is going to push decisively through the other’s defensive line. This is important because a stalemate is an ideal environment for ceasefire talks to start and that have a better chance of succeeding (a “winning side” will either delay negotiations or let them drag on as long as possible). With U.N. Secretary-General Antonio Guterres scheduled to visit Ukraine, as reported by Reuters, it appears that the chance of a negotiated settlement are now increasing.
EPM hopes for an improvement in the Ukraine situation and, simultaneously, that U.S. - Chinese tensions over Taiwan will not to escalate further. The chances of the latter happening are slim, however, as both sides continue to take escalatory action. Reuters reported Wednesday that the U.S. and Taiwan agreed to start trade talks under a new initiative, saying they wanted to reach agreements with “economically meaningful outcomes”. This is another sign of stepped up U.S. support for the island.
To be clear, EPM’s assessment does not mean that we side with one party or another; we, as independent analysts, note that an act by one party (in this case the U.S.) may be considered escalatory by the other party (China) and vice-versa. We acknowledge that moves and counter moves, will lead to increased tension between the two aforementioned parties. And, these tensions will, in a variety of ways, impact the global energy equation and global markets. For a normative analysis of geopolitics (in terms of what is “good” versus “bad”) we at EPM kindly ask you to look elsewhere.
The macro-economy
Turning to the macro-economy, Bloomberg carries an opinion piece warning against taking a too grim a view of Chinese economy. It highlights that while real-estate - the country’s growth engine over the past two decades - has indeed come to a standstill, other sectors of the economy remain on the growth path. Specifically, high-tech sectors - which the Chinese government wants to see become the growth engine of the future - continue to do well. Electric vehicle battery installations in China have increased by 114%, while EV production and sales both more than doubled in July. Foreign Direct Investment in China’s high-tech manufacturing sector increased by 31.1% in the first six months of the year. This is substantial when compared to South Korean, where investment climbed 37.2%, and the US, which was up 26.1%.
Over in the U.S. - according to an account of their July meeting - officials from the Federal Reserve discussed the need to keep interest rates at levels designed to restrict the U.S. economy “for some time” writes The Financial Times. Given the enormity of the inflation problem and “upside risks” to the outlook for price growth, officials supported raising interest rates to the point where they act as a drag on economic growth.
Energy Transition & Technology News
Singapore is taking its ambition to bring the country’s emissions to Net Zero in a unique direction. Small in size, it cannot fully build the required infrastructure of renewables needed to manage the transition. So it needs to import green energy. This it does not intend to do via blue and green hydrogen (or ammonia). Instead, it is laying long distance powerlines. After securing a deal with Australia, Singapore has now also signed a deal with Laos for the import of hydropower, writes Nikkei Asia.
Climate Politics
Bloomberg has a piece analyzing how the Biden administration was able to bring its climate plans back from the dead. The bill was obstructed by primarily by Senator Joe Manchin (West Virgina), but Bloomberg identified people lobbying to support the bill and it identified Bill Gates as a key player. According to Bloomberg, Gates self-confessed he quietly lobbied Manchin and other senators - starting even before President Biden won the White House - in anticipation of a rare moment in which heavy federal spending might be secured for the clean-energy transition. Other key influencers such as: Collin O’Mara, Chief Executive Officer of the National Wildlife Federation - who recruited economists to assuage Manchin’s concerns. These economists included representatives from the University of Chicago and the Wharton School of the University of Pennsylvania; and, Senator Chris Coons (Delaware) who brought in the former Treasury Secretary Lawrence Summers - who has spent decades advising Democrats - to send signals the bill was going to help with the U.S. budget deficit, be deflationary, and spur additional growth and investment in the U.S.
The Electrification of Transport
Tesla and its messianic Chief Executive Officer, Elon Musk, have captured the attention of investors and drivers around the world with one vision of the future of electrified mobility. Bloomberg writes that Wang Chuanfu, billionaire CEO and Founder of BYD - already the largest EV producer in China’s ultracompetitive market - is vying to transform his firm into a major global player in electrified transport by taking a very different approach than Musk’s. BYD has embraced a strategy of vertical integration - not only in manufacturing vehicles - but also in producing its own semiconductors and batteries. It began its foray in the EV market by producing affordable EVs, while Tesla started with the production of high-end premium vehicles. With the threat of a shortage of critical supplies for EVs, such as lithium and semiconductors, over the coming months to years Chuanfu’s strategy might actually support BYD in delivering on its ambition of being the global leader in EVs.
The Global Energy Crisis
The poorest suffer first.
Earlier this week we highlighted events in Kosovo, which, due to the Global Energy Crisis is unable to import electricity, and has been forced into implementing rolling blackouts. According to S&P Global, Modova, the poorest country in Europe, has decided to simply cut gas supplies to any household or company behind on its bills - it too cannot afford to provide any additional support.
Germany has hit is natural gas storage target of 75% capacity by September 1st. The German energy regulator, however, warns that is unlikely Germany will hit the desired 85% storage capacity by October 1st and is even less likely to hit 95% by November 1st. As reported by Reuters, the regulator said that this will likely to translate into a bad winter 2022/2023, but interestingly enough, probably an even worse winter 2023/2024.
Bloomberg looks at the knock-on effects of the worsening energy crisis on commodity industries providing the building blocks for the global economy. Energy-intensive sectors such as steel, fertilizers and aluminum - the most widely used base metal - are being forced to close factories or passing on soaring costs to their customers. Materials that are crucial for electric-car batteries and generating solar power are feeling the pinch, too! It reports the tumult risks further squeezing households struggling with the worst cost-of-living crisis in decades and the crisis is pushing economies into recession. They concluded that if things aren’t bad enough now, they could get much worse in the near future. EPM disagrees with Bloomberg on just one point in the piece: we would have ended the article saying “things are most likely to get much worse”.
According to S&P Global, another industry significantly challenged by the current Global Energy Crisis is plastics and particularly in Europe. Additional supplies are coming online from new U.S. and Chinese capacity while inflation is hurting demand. Another factor, particularly for European producers, is the limited availability of feed stock as the other uses of natural gas and liquids - for heating and generating electricity - are likely to be preferred uses for the resource over coming months.