Energy, Politics & Money - 18 November 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you understand these chaotic times.
In this roundup, we summarize the crude oil price movement over recent days. It continues to be determined by fears regarding demand, as a result of which Brent and WTI are now down for two weeks in a row. But, support is coming from the US price cap plan, because the US government still hasn’t released a detailed implementation plan, setting the world up for a significant disruption once the plan comes into force on December 5th. So late in the game, one would be forgiven for thinking the US is actually trying to cause further disruptions of the oil market.
Furthermore, we look at:
Job losses in the tech industry, where we at EPM analyse why these are occurring and what this says about the global economy (and its demand for energy)
How the US restrictions on semiconductor exports to China increases the risk of hot war
How Europe would respond to a war in Asia between China and the US, where the EPM view is that it should be expected to follow the US (blindly), as it did in Ukraine, although this would devastate the European economy, similar to its sanctions on Russia did, because China is a critical export market for the European economy, much more so than for the US
The statement by Ukrainian president Volodymyr Zelenskiy, that winning back Crimea and Donbas are a prerequisite for any peace talks with Russia, and what this means for the outlook of the Ukraine war
Developments at COP27, where as we at EPM forewarned, a growing gap between the developed world and developing world is preventing progress in negotiations
How the US Environmental Protection Agency regulates the US refining industry
The $20 billion Just Energy Transition Partnership, or JETP, that aims at weaning Indonesia off of coal, and thereby motivate China and India to do the same; neither of which we at EPM believe will result
GM’s announcement that it expects its electric vehicle portfolio to be profitable as of 2025
A review of Qatar Energy, the world’s largest LNG company
General Energy News
Oil is poised for a weekly loss of more than 7%, writes Bloomberg, as concerns over a worsening demand outlook (China & covid, global recession) dominate the market. Brent for January settlement started the day on Friday just above $90 a barrel, while WTI for December delivery was at $82.45 per barrel.
With just 2 weeks to go before implementation, Reuters reports the US finally plans to issue guidance on its Russian oil price cap plan – in a few days time, that is. As you know, the EPM view on the plan echoes that of Dr. Fereidun Fesharaki, who at a conference in Singapore in October called the plan “stupid”, unworkable, and a recipe for further disruption of the global oil market. To his credit, Dr. Fesharaki said all this in front of a senior representative of the US government. We believe Dr. Fesharaki is spot on. The industry – not only consumers of Russian crude oil and refined products but also traders with hedging positions, shippers, insurers, et cetera – have been calling for a details, such that they can manage the plan’s implications. With these details still lacking with just days to go, the US government says it is ready for some “hiccups” in its implementation. How anyone could assume that an unprecedented form of sanctions, on a producer of over 10 million barrels per day, without there being a detailed implementation plan just days before implementation, in the most critical sector of the global economy, will only lead to “hiccups”, is beyond us. One would be forgiven for thinking the US is trying to cause further disruptions of the oil market.
Macro-Economics
Worldwide, the tech industry has already laid off more than 120,000 jobs, writes BBC. While this might signal a new trend in tech, under which “growth at all costs” is replaced by “deliver returns to investors”, similar to what happened in the US shale patch, at EPM we are of the opinion the starting point of it all is the worsening economic outlook. Tightened monetary policy has ended the era of “free money” for large financial institutions, who now can not but respond through tightening their requirements around returns. In addition, the global recession we have forewarned is beginning to affect all industries, includes the advertisement industry which is the major source of income for many firms in the tech sphere.
Geopolitics
An opinion piece in Nikkei Asia says “The restrictions imposed by the US last month on the sale to China of high-tech semiconductors and equipment to make them have rocked the world of geopolitics”. A perspective which we at EPM, as you know, fully agree with, as we earlier compared it to the US oil sanctions on Japan during the interbellum, which pushed Japan to war. Just as Japan then, China today sees these restrictions as a major effort to keep it down, by limiting its ability to develop its highest-technology sectors, such as artificial intelligence and biotechnology. The piece argues It could even lead to an actual hot war if Beijing comes to believe that Taiwan, which currently supplies China with over two-thirds of its chips overall and 95% of its leading-edge ones, will be forced by Washington to stop exporting the semiconductors needed to feed its manufacturing sector. Were Taiwan to do this, China should invade the country to seize its chipmaking factories.
Next in Bloomberg’s review of the potential war in Asia between the US and China, it looks at how Europe would respond. It highlights that US diplomats are telling their European counterparts that the global economy would suffer a hit of $2.5 trillion per year from a Chinese blockade of the island, while a full-on invasion would cause immensely more commercial carnage -- scare tactics with a purpose, as the US tries to win its traditional European allies over to its side in its conflict with China, the most important trading partner of Europe. EPM’s analysis is that the Ukraine war has proven that the US continues to dominate political decision making in Europe, meaning that it is most likely that Europe will join the US in its confrontation of China, even though this would hurt the European significantly – probably more than it would hurt the US. (We would like to add at this point that there really is not much value in trying to forecast how a war in Asia between the US and its allies on the one hand, and China (with Russia and some others) on the other, would affect the global economy and consequently energy. It would be utter and complete devastation, akin to World War II. If you want to prepare for that, you need to build your portfolio squarely inside one of the two camps – and in locations that do not make them easy military targets or likely collateral damage).
As to the war in Ukraine, Ukrainian president Volodymyr Zelenskiy said taking back Crimea, which was annexed by Russia in 2014, as well as the country’s long-occupied eastern Donbas region are conditions for bringing the nine-month war to an end, writes Bloomberg. The EPM view is that one would expect the Ukrainian president – how could he publicly say he is okay with his country losing territory. But, as Henry Kissinger also said at the start of the conflict, Ukraine will have to accept some loss of territory if it wants this war to end anytime soon. A compromise must be found, because neither side appears capable of inflicted upon the other side a decisive loss. Therefore, if a compromise is not found, meaning if both sides in the conflict are not urged by outsiders such as the US and EU to compromise, the Ukraine war should be expected to become a longer-term, low intensity conflict.
Climate Politics
Our coverage of COP27, and the narratives that surrounded it, has highlighted the growing gap between developed and developing countries when it comes to the subject of climate change and emissions management. The developing world did not turn into climate deniers, but has clearly noticed the obvious words and acts of hypocrisy of the developed world (such as the sudden rush to invest in African fossil energy after the Global Energy Crisis began, while earlier telling Africa not to develop these resources, i.e. “you can’t develop them for your benefit but you should develop them when we need them”). Consequently, it is taking a firmer stance in the debate. Support to go along with the developed world’s narrative that “everyone has to reduce emissions” has plummeted, while demands for funds to finance an energy transition in the developing world, and compensation for the climate change impacts caused by the historic emissions of the developed world, have strongly increased. According to United Nations chief Antonio Guterres exactly this is preventing a new deal at COP27 to make the climate change agenda forward, reports Reuters.
A Bloomberg report on how the US Environmental Protection Agency regulates the US refining industry provides further evidentiary support for the criticism of “hypocrisy” being directed at the developed world. While refining is a major contributor to global warming, the report says, the EPA doesn’t directly regulate its greenhouse gas emissions. While the EPA does regulate other hazardous pollutants, the penalties are often too low to ensure compliance, and in many cases the agency isn’t as tough as it could be. The consequence is that many refiners in the US do as they wish, because many times there are no consequences, and if there are, the penalties are limited.
Bloomberg also looks at the $20 billion Just Energy Transition Partnership, or JETP, that intends to wean Indonesia off of coal for power generation, and is to be funded 50-50 by a consortium of rich countries and developed-world banks. If it succeeds, it would cap emissions from Indonesia’s power sector at 290 million metric tons by 2030, not much more than the 258 million tons of pollution in 2019. Renewable generation would rise to 34% of the total by the same date, up from 18% at present, while coal-fired power plants would retire early. It argues the plan is a “model” that, if successful, could wean China and India of their coal-based power plans. At EPM we doubt it. First, considering the entrenched established interests in coal among Indonesia’s political elite, we doubt the plan will be able to achieve much. Second, we doubt China and India need any convincing from anyone as to what their energy security strategy should be. In particular China has its own plans, and it knows exactly what role it wants coal to play in it and how (as we discussed last week here at EPM).
The Electrification of Transport
General Motors has forecast that its electric vehicle portfolio will be profitable in 2025, writes The Financial Times. The largest US carmaker told investors that it expects to generate more than $50bn in revenue from sales of 30 EV models in 2025, or more than a fifth of total revenue of $225bn. By 2024 GM plans to make 400,000 EVs as it chases Tesla’s pole position as the top North American EV manufacturer.
Other
The Financial Times has a review of Qatar Energy, formerly Qatar Petroleum, the world’s largest exporter of LNG. It aims to raise its production outside of Qatar from 45,000 barrels of oil equivalent a day to 500,000 boe/d by 2030. Domestically, Qatar produces more than 5mn boe/d, including some oil and a vast amount of LNG.