Energy, Politics & Money - 19 April 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we finally take a closer look at the recent leak of US secrets and the arrest of Jack Texeira. We at EPM struggle to understand how a 21-year-old, low ranked individual could possibly be the true source of the leaks. In our view, the leak looks like it originated from an actor deeply worried about the conflict’s trajectory. They highlight, namely, that this trajectory is all-out World War 3.
Ukraine needs even more Western support, to which China is likely to respond by offering military aid to Russia, thereby setting the stage for a major escalation and regional expansion of the conflict (eerily similar to unstoppable domino effect that led to World War I). As to who might have done this (those US insiders that have also been speaking to Seymour Hersh or perhaps a European actor perhaps?), this is impossible to tell.
But if our assessment is correct, EPM hopes the source of the leaks succeeds in his or her objective to bring the fighting parties to the negotiating table to end this senseless conflict.
Furthermore, we look at:
The strong decline in refining margins in Asia, likely due to weak product demand, and as such a potential indicator of the global economic downturn we at EPM have been forewarning since the start of the rise in interest rates
The outlook for the Permian in the US, which could grow 40% to almost 8 million barrels per day by 2030, effectively adding another Iran to global oil supply
The view of legendary investor Jeremy Grantham on the financial crisis of last month
The likelihood of the Chinese yuan taking over the role of global reserve currency from the US dollar
The meeting between the Chinese and Russian defense ministers this week, signaling closer cooperation going forward
The filter technology behind Direct Air Capture (DAC) systems, one of the most expensive ways to deal with the GHG emissions issue, but also the one that allows for continued usage of the conventional energy systems, which is why it is attraction billions in subsidies
The European Parliament agreement to make EU climate change policies more ambitious, which includes CBAM as of 2026
The critical role played by the weather in helping Europe through last winter without Russian energy supplies
General Energy News
There is an increasing disconnect between the forecasts for strong global oil demand growth this year, led by Asia, and the reality of weakening margins for refined fuels, writes Clyde Russel of Reuters. The profit from turning a barrel of Dubai crude into refined products at a typical Singapore refinery dropped to $2.53 a barrel on Monday. This was the lowest since Oct. 27 and down 82% from the peak so far in 2023 of $14.33 a barrel on Jan. 25. It is also about a quarter of the moving 365-day average of $10.34 a barrel. The drop in refinery profits is being led by a contracting margin for gasoil, the base for diesel and jet fuel, indicating that sectors such as construction and manufacturing may be starting to come under pressure. In our view at EPM, this could well turn out to be the first clear warning that the global economic downturn that we for forewarned when interest rates began to pushed up, is now indeed happening.
This is also the dominant sentiment among crude oil traders at present, writes Reuters. Oil drifted lower on Wednesday as the market weighed potential interest rate hikes from the Federal Reserve that could slow growth and dampen oil consumption, offsetting falling U.S. inventories and strong Chinese economic data, it says. Brent crude futures shed 7 cents to $84.70 a barrel at 0320 GMT. WTI crude was down 5 cents to $80.81 a barrel.
Looking ahead to 2030, the final wave of the Permian Basin oil boom is expected to add the equivalent of Iran’s total output to global production, writes Bloomberg, hitting a peak of 7.86 million barrels a day. However, the pace of expansion will be slow, meaning OPEC+ will remain in the driving seat of oil market in the near term. Furthermore, the downside risks are that producers continue to focus on returns to investors rather than production growth, and cost inflation due to shortages of everything from labor to steel pipes and drilling equipment.
Macroeconomics
Legendary investor Jeremy Grantham, founder of investment firm GMO and predictor of both the dot-com crash in 2000 and the financial crisis in 2008, warns another epic bubble in financial markets is in the process of bursting. The turmoil that swept through the banking sector last month is just the beginning, he told CNN. “We’re by no means finished with the stress to the financial system.” What’s more worrying is that this time, Grantham believes bubbles present in the stock and real estate markets are poised to burst simultaneously. He blames central bankers and their monetary easing policies for the emergence of the latest market bubble in the United States, as these artificially drove up the value of financial assets, setting the stage for crashes.
Paul Hodges of New Normal shares his view on the de-dollarization in an interview with The China Project. De-dollarization requires an alternative currency to step up and take the role of global reserve currency. The Chinese yuan is unlikely to take that role any time soon, Hodges says, because of politics. The global economy will not switch to a reserve currency that is not freely floating and affected by capital controls (i.e., the Chinese government periodic actions prohibiting the transfer of money to outside China). According to Hodges, the Chinese government is unlikely to change its policies, because of the stress it is experiencing in its real estate market:
China has vast debts — currently 295% of GDP — and it is dealing with the after-effects of a major real estate bubble. Property prices are far higher than in New York or London, in terms of local people’s income. So China cannot risk capital flight caused by a rush to take money abroad.
This is another reason why, in the EM view, all the talk of de-dollarization and “the end of the petrodollar” is greatly overblown.
Geopolitics
EPM has not yet commented on the leaks of US secrets, and the arrest of Jack Texeira in this regard. As the Financial Times looks at the puzzling question “how could a 21-year-old, low ranked IT worker get his hands on such sensitive information, from a variety of organizations (Pentagon and CIA)”. Our speculative view is as follows:
The leaks were mostly photocopies of hardcopy documents, not softcopies downloaded from servers. As such, we struggle to believe that Texeira is the real source of the leak – he might have been the one who put the docs on the internet, but someone else, with access to the hardcopies and the ability to make and smuggle photos of the hardcopies out of the secured locations where these documents are held must have handed these to him.
The leaks embarrass all actors in the Ukraine War. They reveal severe weakness on the Ukrainian side, and an ability to resist the Russian invasion much longer if western support is not ramped up. They reveal the US has sources deep inside the Kremlin and Russian defense ministry, giving them access to Russian plans. They reveal USA spying on allies, and heavy-handed US tactics to force its allies to do its biddings. They reveal a Chinese willingness to support Russia militarily.
This in our view indicates the leaks are not the act of Russia or China, designed to weaken their opponents (such as the leak of the Victoria Nolan phone conversation during the Maidan uprising, where she famously said “F*uck Europe!”); or of the US, designed to spread disinformation to mislead the Russians. In our view, the leaks look more like coming from an actor worried about the trajectory the conflict is on. They highlight, namely, this trajectory leads to an all-out World War 3. Ukraine needs even more western support, to which China is likely to respond by offering military aid to Russia, setting the stage for a major escalation and regional expansion of the conflict. As to who might have done this (the US insiders that have also been speaking to Seymour Hersh, or a European actor perhaps?) it is impossible to tell. But if our assessment is correct, we hope the source of the leaks succeeds in his or her objective to bring the fighting parties (here’s looking at you, US and Russia) to the negotiating table to end this senseless conflict.
Chinese and Russian defense ministers this week agreed to expand cooperation and pledged “firm” support for each other, writes Bloomberg. China’s Li Shangfu and his Russian counterpart Sergei Shoigu talked in Moscow on Tuesday, and agreed to maintain close, high-level communications.
Energy Transition & Technology News
USA Today looks at the filter technology of Direct Air Capture (DAC). The Inflation Reduction Act of 2022 provides billions of dollars to companies that perform this type of carbon capture. It is one of the most expensive ways to deal with the GHG emissions issue. But it is the one that allows for continued usage of the conventional energy systems. And that, in the EPM view, probably explains this very expensive policy decision.
Climate Politics
The European Parliament agreed to implement sweeping reforms to make EU climate change policies more ambitious, writes Reuters. Under the upgrade, factories will lose the free CO2 permits they currently receive by 2034, and shipping emissions will be added to the CO2 market from 2024. Lawmakers also backed the EU's world-first plan to phase in a levy on imports of high-carbon goods from 2026, targeting imports of steel, cement, aluminum, fertilizers, electricity and hydrogen (but not oil or LNG?).
The Global Energy Crisis
John Kemp of Reuters explains the critical role the weather has played in getting Europe through this winter without access to Russian energy. Land temperatures across the northern hemisphere were +2.02°C higher than the long-term average (1901-2000) between October and March, he says. And for the hemisphere as a whole, it was the fifth-warmest winter on record. But Europe’s temperatures were +2.42°C above the long-term average, making it the second-warmest winter ever recorded in the area. Next year Europe might not be so lucky.