Energy, Politics & Money - 19 September 2022
We are late with posting today – hence no summary today, but it will be back tomorrow.
General Energy News
NEW PIPELINE TO CHINA FROM RUSSIA
According to Asia Times, negotiations between Russia and China to build a new pipeline designed to transport annually 50 billion cubic meters of gas between the two countries through Mongolia, the Power of Siberia 2, are expected to close soon after the three countries’ leaders met in Uzbekistan.
Macro-Economics
BEHIND THE CURVE – THE IMF AND WORLD BANK
During July, when we first shared out base case outlook for the global economy here on EPM, we warned that the main international financial institution the IMF and World Bank are habitually behind the curve, and can therefore not be relied upon when doing scenario planning and strategizing for the future. That was again confirmed this week as the World Bank announced, after careful study, that “the world may be edging toward a global recession as central banks simultaneously raise interest rates to combat persistent inflation” reports The Guardian.
FEDEX GROWS COLD ON GROWTH
While the World Bank economists in their ivory towers continue to stare at their screens, wondering what their fancy models will predict next, those operating in the real economic are clear on what is happening. Global delivery firm FedEx on Thursday withdrew the financial forecast it issued just three months ago, Reuters reports, saying a global demand slowdown accelerated at the end of August and was on pace to worsen in the November quarter.
THE FED AND INTEREST RATES
The US central bank will lift its benchmark policy rate above 4 per cent and hold it there beyond 2023 in its bid to stamp out high inflation, according to the majority of leading academic economists polled by the Financial Times.
Geopolitics
NO QUICK END TO THE WAR
The successful Ukrainian offensive is unlikely to result in a quick end of the war – and that’s the most important thing to remember when considering how the conflict is likely to affect the global economy going forward. Russia will not now “pack up and go”, but is more likely to escalate. Bloomberg reports Putin as saying “just recently the Russian armed forces hit some sensitive targets. Let’s consider that warning strikes”. In comments to reporters, Putin also reiterated his claim that he’s ready to negotiate with Ukraine. But, Ukrainian officials have demanded a full Russian withdrawal as a condition for a diplomatic solution.
CHINA AND INDIA COOL TO RUSSIA
On the sidelines of the Shanghai Cooperation Organization in Samarkand, Uzbekistan, where earlier president Xi of China had raised “questions and concerns” with Putin over Russia’s invasion of Ukraine, India prime-minister Modi shared with Putin a similar message, writes Bloomberg. Modi told Putin that “today’s era is not one for war”, during a face-to-face meeting on Friday. What we at EPM believe this means is that while China and India have no issue with maintaining economic relations with Russia, or even deepening them as Russia’s western markets retreat, they do not intend to intervene on the side of Russia in its geopolitical conflict with Ukraine, the US and Europe.
US SANCTIONS – STRATEGIC BLUNDER (PT 1)?
The National Interest argues the US has made a strategic blunder by pushing for continued fighting in Ukraine and sanctions on Russia, rather than for a negotiated settlement early on. The consequence, it argues, is acceleration of development of an economic bloc outside the US sphere of influence, and a redirection of energy flows outside of US control. China used to be burdened by the fact that Middle Eastern oil had to pass through the narrow Malacca Strait between Indonesia, Malaysia and Singapore, which in the case of conflict can relatively easily be choked off. The Ukraine conflict incentivizes Russia to collaborate more closely with China on energy, and Russian oil and gas can be transported to China no easily disrupted by western powers.
US SANCTIONS – STRATEGIC BLUNDER (PT 2)?
Foreign Affairs has a similar perspective and argues China will benefit greatly from the Western response to Ukraine. Beijing is unlikely to bail Moscow out or significantly help modernize the Russian economy. China will, however, do enough to sustain a friendly regime in the Kremlin—to advance Chinese national interests—by purchasing Russian natural resources at knockdown prices, expanding the market for Chinese technology, promoting Chinese technological standards, and making the renminbi the default regional currency of northern Eurasia. Given its growing leverage, Beijing will be able to extract from Moscow something that was unthinkable a year ago: access to the most sophisticated Russian weapons and their designs, preferential access to the Russian Arctic, the accommodation of Chinese security interests in Central Asia, and Russia’s support—as a permanent member of the UN Security Council—for China’s positions in all regional and global issues, most notably in territorial disputes between China and its neighbors.
DEGLOBALIZATION ACCELERATES
The Ukraine conflict is therefore clearly accelerating the “deglobalIzation” or “regionalization” trend that we have been speaking of extensively here at EPM. On that subject, Germany has announced it is working on a new trade policy with China, to reduce dependency on China by making trade with the country less attractive. To put this into context, the South China Morning Post writes, China has been Germany’s biggest trade partner for the past six years, with volumes reaching over €245 billion (US$246 billion) in 2021. In other words, within a matter of months, Germany’s politicians have decided to abruptly cut relations with its main energy supplier (Russia) AND to disengage from its most important trade partner (China). If you are working an outlook for the German and/or European economy, please factor that in – obviously the impact of the policy U-turn will be massive.
SO MUCH FOR STRATEGIC AMBIVALENCE
Lastly, the US is clearly abandoning “strategic ambivalence” with regards to military support for Taiwan. Nikkei Asia reports that in a CBS 60 Minutes interview broadcast on Sunday, President Joe Biden said US forces would defend Taiwan in the event of a Chinese invasion. Asked to clarify if he meant that unlike in Ukraine U.S. forces, men and women, would defend Taiwan in the event of a Chinese invasion, Biden replied: “Yes”. In other words, no off the cuff remarks that can be explained away as a “mistake” or “misunderstood”, but a carefully prepared, explicit answer that leaves nothing to the imagination.
Energy Transition & Technology News
BARRIERS TO HYDROGEN ADOPTION
Hydrogen fuel cells have faced two challenges for broad adoption: hydrogen is far less efficient than diesel and hydrogen fueling infrastructure in Europe is virtually non-existent. As to the first, Hydrogen fuel cell maker Loop Energy says its latest cell system can deliver better fuel economy than a diesel engine at current price levels, Reuters reports. Based on a pan-European diesel cost of $1.91 per litre and $10 per kg of hydrogen, a truck could travel just over 111 miles (179 km) on $100 worth of fuel using its new S1200 hydrogen fuel cell system versus a little over 109 miles for an equivalent diesel truck, the company says.
COMPACT CARBON CAPTURE
Japan's Mitsubishi Heavy Industries is preparing to launch a line of compact carbon capture units next year, writes Nikkei Asia. Mitsubishi hopes the smaller units will open the door to more widespread use of CCUS, beyond the oil, steel, and power industries. It says interest in carbon capture is growing beyond conventional customers, particularly in fields where reducing emissions is difficult due to technological or cost barriers. Others are concerned about their image as pressure to go green increases, the company added. Places where the units could be installed include ships, garbage incineration plants, and gas-fueled power plants.
EUROPEAN RARE EARTH PROCESSING TO INCREASE
Belgian chemicals group Solvay plans to create the second European site producing rare earths vital for the energy transition, writes The Financial Times. Its La Rochelle plant in France will be upgraded to separate a larger range of the 17 rare earths to include neodymium and praseodymium, which are crucial in the production of magnets for electric vehicles and wind turbines.
A PROMISING FUTURE FOR HYDROGEN
Based on a balanced review of pros and cons, Foreign Affairs concludes that although the journey to green hydrogen will be a bumpy ride, the optimism is warranted, and the hype is justified. Because, it says, climate advocates can feel good that its falling production costs should make the world’s 2050 climate goals easier to achieve than they were just five years ago; those who focus on energy security see a way to diversify fuel supplies and reduce the power of individual geopolitical actors; organized labor sees jobs; banks see returns; and those concerned with global equality see a chance to shrink the gap between the global North and the global South. We at EPM do highlight, however, that it will all depend on the technologists delivering upon their promises as to the scale and cost at which they say they will be able to produce green (and blue) hydrogen by 2040 and 2050.
Climate Politics
ENVIRONMENTALISTS DEMAND GREEN RULE BOOK REVIEW
Bloomberg writes Greenpeace as well as non-profits ClientEarth, WWF, Transport & Environment and BUND, have demanded the EU review its decision to include gas and nuclear power in the EU’s green rulebook, known as the taxonomy. The European Commission has until February to reply, or the groups said Monday they will take the case to the European Court of Justice.
The Electrification of Transport
SUPER COMPETITIVE CHINA EV MARKET
Nikkei Asia reports on the market for electric cars in China, the largest and probably most developed market for EVs. It says that as China winds down the generous consumer subsidies that helped its market for new-energy vehicles surpass that of any other country, the landscape is shifting. While the largest players Tesla and BYD, look set to hold onto their leading positions for now, second-tier companies Nio, Xpeng and Li Auto are seeing their first-mover advantage erode as state-owned carmakers flush with cash and ready to invest are moving in, supported by the entry of companies like Huawei and Baidu into the smart-car software market. The increased competition has led to a realization that just electrifying cars will not be enough. To be successful in the EV space, companies also need to be able to compete when it comes to intelligent features and vehicle autonomy.
INFLATED US EV PRICES
Bloomberg writes, in July the average US starting price for a battery-powered vehicle — the figure shown in car commercials and marketing materials — was $47,636. The average sticker price for EVs that were actually made and shipped to dealerships, however, was $61,251, almost one-third higher. To put this into context, the spread between starting and sticker prices is also massive on gas-powered cars these days, Bloomberg mentions, but it is more pronounced with EVs. This indicates part of the reason is supply shortage. Another part, and this is probably why for EVs the gap is bigger, is that in the early days following launch of a new model, car manufacturers tend to produce mostly the more expensive high-spec versions. And essentially all EVs on the market today are new models. With this in mind, the expectation is that it will take two years for more base-spec models to come available and sticker prices to come down.
The Global Energy Crisis
LIMITED GLOBAL LNG SUPPLY
Some cold water on the idea that Europe will be able to source sufficient alternatives to Russian gas this winter. In an interview with Le Point, the emir of Qatar said his country will not be able to re-supply Europe with enough liquefied natural gas to stave off an energy crisis this winter. He therefore urged both parties to bring a speedy end to the war. “We want to help Europe, and we will supply gas to Europe in the coming years. But it is not true that we can replace Russian gas”, Tamim al Thani said. “Russian gas is essential to the global market”. In the same week the US shale industry warned it too cannot rescue Europe with increased oil and gas supplies this winter, according to The Financial Times. “It’s not like the US can pump a bunch more. Our production is what it is”, said Wil VanLoh, head of private equity group Quantum Energy Partners, one of the shale patch’s biggest investors. “There’s no bailout coming. Not on the oil side, not on the gas side”.
ESG
ESG – ADDING INTANGIBLE VALUE TO THE FINANCIALS
An article on Fortune provides an interesting perspective on why ESG is / should be important for any company. “A very simple way to think about it is that we’ve seen a shift from tangible to intangible value in terms of corporate valuation. It used to be, back in the 20th century, corporate valuations came from plants, buildings, machinery, cash assets. Now it comes from branding, network effects, stakeholder trust, R&D, IP. And so all of this basically means that stakeholder perceptions, public perceptions, employee perceptions are a far greater proportion of corporate value than they used to be. And that largely accounts for the investor interest (in ESG).”
Other
US ENERGY POLICY – HOW ABOUT ‘ALL OF THE ABOVE’?
A discussion of US energy policy in The National Interest, where an opinion piece argues an “all of the above” approach is the only correct approach: “President Joe Biden needs to rethink his energy-climate-prosperity paradigm. His current thinking holds that the U.S. fossil fuel industry needs to be restrained because its carbon dioxide (CO2) emissions are causing imminent and catastrophic damage to the Earth. His solution is to hamstring the fossil fuel industry while pushing a government-financed accelerated transition to renewables. That is neither the way toward a reliable energy supply nor reduced emissions. Instead, the new paradigm should be an expansive ‘all-of-the-above’ energy policy that promotes the growth of all American energy sources: fossil, solar, wind, nuclear, hydro, geothermal, and more.”
TECHNOLOGY SELF SUFFICIENCY
The Financial Times has a deepdive on China’s ambition to become self-sufficient, including in the area of technology. It asks the question, how realistic is this self-sufficiency goal in a connected world? The strategy has several constituent parts and — if successful — will take several years to realize, analysts say. In technology, the aim is to spur domestic innovation and localise strategic aspects of the supply chain. In energy, the objective is to boost the deployment of renewables and reduce reliance on seaborne oil and gas. In food, the path to greater self-reliance includes revitalising the local seed industry. In finance, the imperative is to counter the potential weaponisation of the US dollar.