Energy, Politics & Money - 20 February 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in these chaotic times.
In this roundup, EPM looks at:
JP Morgan’s view on the outlook for oil, which considers it unlikely to breach $100 a barrel level this year (barring any significant geopolitical drivers)
Mohammed El Erian’s view on the outlook for inflation
The refreshing, “unaligned” perspective of Kishore Mahbubani on the Russia-Ukraine conflict
The Munich Security Conference, where US – China relations were the dominant theme, and the US and its allies pressured China to not support Russia and its war on Ukraine
BYD’s plan to sell nearly 2 million EVs this year, through operations in 40 countries globally, focusing on the luxury car segment
The “upstream” moves of Tesla and GM, with the former considering an investment in a lithium mining and refining company, and the latter an investment in Vale
A report that soaring energy prices triggered by the Russia-Ukraine conflict could push up an additional 141 million people globally into extreme poverty
The review of how the Global Energy Crisis has played out so far – disproportionately affecting the developing world
The outlook for British industry, as companies will lose the majority of the energy cost subsidies they have enjoyed since October 2022 in April 2023
The accusation faced by the offshore wind industry in the US, that it is responsible for dead whales washing up on the shores of New Jersey
The analysis of advocacy for and against climate policies and the energy transition, which shows that the against-camp, primarily the Oil and Gas industry, outspent climate-supporting industry groups 27 to 1
General Energy News
China is expected to import a record amount of crude oil in 2023 due to increased demand for fuel as people travel more following the dismantling of COVID-19 controls and as a result of new refineries coming onstream, writes Reuters. China's crude imports may rise between 500,000 and 1 million barrels per day (bpd) this year to as high as 11.8 million bpd, it says, based on analysis from Wood Mackenzie, FGE, Energy Aspects and S&P Global Commodity Insight.
Brent oil prices are unlikely to breach the $100 a barrel level this year, barring any significant geopolitical drivers, with OPEC+ potentially adding supply and Russian flows recovering by mid-2023, JP Morgan believes according to Reuters. Just to put this into context, EPM would like to contrast this view with that of Goldman Sachs, which since late 2021 has been saying “oil will break $100 shortly!”.
Macroeconomics
Mohammed El Erian writes for Project Syndicate saying that the concept of “transitory inflation”, i.e. that current inflation is solely the result of a temporary supply shock, is comforting in its simplicity, but could also encourage dangerous complacency. Looking ahead to the rest of the year and early 2024, he sees three possibilities. The first is orderly disinflation, in which case inflation continues to come down steadily toward the Fed’s 2% target without damaging US economic growth and jobs. The second scenario is one in which inflation becomes sticky. The inflation rate continues to decrease but then gets stuck at 3-4%, which would force the Fed to choose between crushing the economy to get inflation down to its 2% target or waiting to see whether the US can live with stable 3-4% inflation. Thirdly, “U inflation”, that is, an unexpected increase in inflation as a fully-recovered Chinese economy and the strong US labor market simultaneously drive up demand, which El Erian sees as an outcome with 25% probability.
Geopolitics
85 per cent of the world hasn’t imposed sanctions on Russia after its illegal invasion of Ukraine, despite a majority also voting in favour of the UN General Assembly resolution deploring it, writes Kishore Mahbubani over at South China Morning Post. In his refreshing, “unaligned” perspective on the conflict, this is, he says, because many leaders do not buy the “black and white” story that the West is selling on the conflict: Ukraine and the West are completely virtuous; Russia is completely evil. He also says the West would get more support for its cause in Ukraine if it was seen to be pushing for either a peace proposal or a fair compromise on Ukraine. Instead, it is seen to be pursuing a strategy of complete victory and humiliation for Russia, which is an outcome that would not be in the interests of the Global South, as it prefers a multi-polar world, with Russia as an independent pole and thereby providing them with geostrategic options. What the Global South would like to see happen, he says, is an immediate ceasefire and cessation of the conflict which has disrupted global food and energy supplies. This should be followed by a fair and balanced compromise: Ukraine would become a free and independent sovereign country, free to join the European Union if it so wished; yet, out of respect to Russia’s sensitivities, it would not join NATO. The sticking point of course, is the territory “acquired” by Russia.
US-China relations and the threat posed to European security by Russian aggression dominated the Munich Security Conference, where senior Western foreign policy, defense, and intelligence officials gathered for three days of meetings on the eve of the first anniversary of the Russian invasion of Ukraine, writes the Financial Times. China’s top foreign policy official Wang Yi told the Conference that China “was not directly concerned in the conflict [in Ukraine], but was not standing idly by” and would soon publish a position paper on how to find a political solution. China’s initiative is expected to be unveiled in the coming week, around the February 24 anniversary of Russia’s full-scale invasion of Ukraine. Antony Blinken, US Secretary of State, said the west would be sceptical of a Chinese peace initiative that called for an immediate ceasefire.
Separately, the US said it is “very concerned” because it believes China is considering supplying Russia with weapons and ammunition in Ukraine, according to another Financial Times report. US Secretary of State Anthony Blinken said he told Wang Yi that such support would have “serious consequences” for the US relationship with Beijing during a meeting on the sidelines of the Munich Security Conference on Saturday.
The Electrification of Transport
Nikkei Asia writes, BYD plans to sell nearly 2 million EVs this year, through operations in 40 countries globally, with a focus on the luxury car segment as competition in this price range is intensifying. BYD is set to release the Yangwang U8 off-road SUV and the U9 super car in 2023 at expected prices between 800,000 yuan ($116,878) and 1.5 million yuan.
Meanwhile, Tesla is weighing a takeover of battery-metals miner Sigma Lithium, writes Bloomberg, to secure steady supply of the critical material. Sigma Lithium is developing a large lithium rock deposit in Brazil known as Grota do Cirilo. The company said in December that it’s considering nearly tripling lithium production at the project in 2024 after survey revealed mineral reserves 63% higher than previously thought.
Tesla is far behind GM in this area, as the latter already has a number of deals in the battery materials supply chain under its belt writes Bloomberg. In October 2022, GM invested $69 million in Australia’s Queensland Pacific Metals, a producer of nickel and cobalt. In January 2023, it bought a $650 million stake in Lithium Americas to help develop Nevada’s Thacker Pass mine. Now, the US automaker is competing for a stake in Vale’s base metals unit, a deal which would give GM access to the Brazilian mining giant’s copper and nickel resources that are key to making EV batteries. The key to EV success appears linked to controlling the full value chain.
The Global Energy Crisis
The Guardian writes soaring energy prices triggered by the Russia-Ukraine conflict could push up to 141 million more people around the globe into extreme poverty. A study modelled the impact of higher energy prices on the spending of 201 groups, representing different expenditure levels, in 116 countries, covering 87.4% of the global population. Despite efforts by governments to insulate consumers from the price rises, researchers estimated that overall household expenditure rose by between 2.7% and 4.8%. As a result, they estimate that an additional 78–141 million people worldwide could be pushed into extreme poverty.
At The Conversation, Amy Myers Jaffe analyses how the Global Energy Crisis has played out so far. Thanks to a combination of preparation and luck, Europe has avoided blackouts and power cutoffs, she notes, but less wealthy nations like Pakistan (planning a move to 100% coal for power) and India have contended with electricity outages on the back of unaffordably high global natural gas prices, proving her view that less wealthy nations often suffer the most from globalized oil and gas crises. Looking ahead, she has a few interesting points to make.
Russia’s recent decision to cut oil production could be a political decision, rather than one forced upon the country by a lack of customers, in which case it could be followed by further political decisions aimed at pressuring adversaries.
The US Inflation Reduction Act is keeping much of the available funding for climate finance at home, which is likely to worsen the clean energy technology knowledge gap between the developed and the developing world.
Looking ahead, as European natural gas prices fall to an 18-month low - due primarily to mild weather two articles - here Financial Times and here Financial Times - trade bodies and analysts warn that many British companies will not be able to survive once the British government lowers its energy-cost related support in April. They highlight the fact that current energy prices remain three times higher than pre-Ukraine War levels and well above the levels in competing nations. This takes us back to EPM’s analysis of European government finances that we reported on last week, which made it clear they are unable to maintain current levels of financial support without risking a major financial crisis.
Looking even further ahead, Fatih Birol, Head of International Energy Agency (IEA), warned of possible energy shortages next winter as relatively little new liquefied natural gas (LNG) is coming to the market while China's consumption is set to rise this year, writes Reuters. Birol sad:
For this winter it is right to say that we are off the hook. If there are no last minute surprises, we should get through...maybe with some bruises here and there. But the question is...what happens next winter?
Other
Since early December, close to two dozen large whales have washed up on or near beaches on the US Atlantic coast, and about a third of the so-called strandings have occurred on the shores of New Jersey. It’s unclear what exactly is fueling the deaths, but, Bloomberg writes, an unlikely coalition of wind opponents, local environmental groups and conservative talk show hosts have zeroed in on offshore wind as the culprit. They argue that projects in development are disrupting marine life and contributing to the unusually high number of deceased whales.
The Conversation writes trade associations which historically have opposed climate policies spent $2 billion in the decade from 2008 to 2018 on political activities, such as advertising, lobbying and political contributions. Together, they outspent climate-supporting industry groups 27 to 1. The oil and gas sector was the largest financier, spending $1.3 billion.