Energy, Politics & Money - 20 June 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 take a closer look at India’s increased purchases of Russian crude oil. In the year through March 2023, India imported a daily average of 1.02 million barrels of Russian crude. That represents an eleven fold increase from the previous year and 20% of the country's overall oil imports. Russian oil offered India three benefits:
Curbing inflation
Improving its trade balance and
Diversifying supply.
But the entire world benefitted from India’s tilt towards Russian energy. It has left more non-Russian available to crude importers that joined the sanctions on Russian energy, and by exporting some of the refined products coming from the Russian crude oil, India actually kept more Russian crude oil on the market, preventing global supply – demand imbalances. At EPM we believe this is probably why the US acquiesced to India’s imports, and dropped its earlier threats.
Furthermore, we look at:
Berkshire Hathaway’s increased investment in the sogo shosha, the five major Japanese trading houses Mitsubishi, Mitsui & Co, Itochu, Marubeni and Sumitomo, which increases Warren Buffet’s exposure to the commodities markets
The latest long-term LNG contract signed by a Chinese company, behind which EPM believes is a strategy to become a major player on the LNG spot market – where Europe buys most of its LNG
China's decision to cut key lending rates, including a mortgage-linked benchmark, which did not provide support to crude oil prices as traders had expected a bigger cut
The messaging between China and the US during Blinken’s visit, which does nothing to improve our EPM view on the likely future for relations between the two countries
The view that China’s economic slowdown is likely to be longer-term, and increases the risk of military conflict with the US, as the country is likely to promote nationalism to maintain domestic stability when the economy weakens
China’s alternative to the West's "rules-based international order", namely the Global Civilization Initiative (GCI), or "Xivilization"
What governments should do to incentivize EV battery recycling
The low water levels in the Rhine river, which reminds EPM of the massive risks the European economy is facing, and how easily it can be pushed off the proverbial cliff
Gideon Rachman’s assessment of the relationship between the US and the EU, which he sees as increasingly lopsided, which in the view of EPM means that the EU will become a vassal of the US, if it does not quickly develop real, independent strategic thinking
General Energy News
Under Macroeconomics we discuss China’s decision to lower interest rates. Oil prices were not supported by the decision, writes Reuters, as traders had expected a bigger cut for more support to the Chinese economy. Brent crude was down 5 cents at $76.04 a barrel at 0310 GMT. U.S. West Texas Intermediate (WTI) crude for July was down 99 cents from Friday's close at $70.79.
Nikkei Asia looks a little deeper at India’s increased purchases of Russian crude oil. At the start of the Ukraine War, EPM remembers the US threatening India not to increase its purchases too much, and only to supply its domestic market. India never listened, Nikkei Asia documents. India began to boost oil imports from Russia in April 2022, less than two months after Russia invaded Ukraine. In the year through March 2023, India imported a daily average of 1.02 million barrels of Russian crude. That represents an eleven fold increase from the previous year and 20% of the country's overall oil imports, according to India's Ministry of Commerce and Industry. As a result, Russia became the nation's largest oil supplier, rising from 10th place a year earlier. Russia was followed by Iraq, which supplied 1.01 million barrels and Saudi Arabia, which sold 790,000 barrels. This offered India three benefits: curbing inflation, improving its trade balance and diversifying supply. But, Nikkei Asia highlights, the entire world benefitted from India’s tilt towards Russian energy. It has left more non-Russian available to crude importers that joined the sanctions on Russian energy, and by exporting some of the refined products coming from the Russian crude oil, India actually kept more Russian crude oil on the market, preventing global supply – demand imbalances. At EPM we believe this is probably why the US acquiesced to India’s imports, and dropped its earlier threats. This is also the Nikkei Asia assessment: the G7 and the EU let India do the "dirty work" of purchasing Russian oil to avert a full-blown crisis.
As for LNG, Qatar is set to secure a second huge gas supply deal with a Chinese state-controlled company in less than a year, writes the Financial Times. China National Petroleum Corporation and QatarEnergy are expected to sign a 27-year agreement on Tuesday, under which China will purchase 4mn tonnes of LNG a year from the Gulf state. CNPC will also take a 5 per cent equity in one of the LNG trains in Qatar’s expansion project in its North Field. EPM notes this further cements China’s leading role in the LNG market. It has dominated long term supply contracts over past few years, probably contracting significantly more than it needs domestically. EPM believes that behind this is a strategy to become active in the spot market – where Europe buys most of its LNG, and where China’s its massive volumes of contracted LNG will thus give it significant influence.
Berkshire Hathaway, the U.S. investment company led by prominent investor Warren Buffett, has purchased additional shares in five major Japanese trading houses, sending its average ownership of them to more than 8.5%, writes Nikkei Asia. The trading companies are Mitsubishi, Mitsui & Co, Itochu, Marubeni and Sumitomo. In four out of the five companies, Berkshire's holdings exceeded 8%. The trading companies, in Japanese called "sogo shosha," welcomed the increase in their shareholdings. Javier Blas of Bloomberg earlier did a deep dive on Buffet’s entry into the companies. The sogo shosha are huge in metallurgical coal, oil and liquefied natural gas, he said, and they made massive profits from the 2022 disruptions in global energy markets due to COVID reopening and the Ukraine War. In all, Blas says, Buffet now has a significant presence in the commodities markets. Berkshire is also the largest shareholder in Chevron, the second-largest American oil company. It owns Burlington Northern Santa Fe Railroad, which ships bucket loads of US coal. And its utility subsidiary also produces electricity from coal and natural gas (and increasingly from wind, too). Blas forgot to mention Buffet’s participation in Occidental.
Macroeconomics
China's central bank cut key lending rates Tuesday, including a mortgage-linked benchmark, which Nikkei Asia says was a widely expected move to spur investment and consumption after the country's post-pandemic recovery softened over the last five months. The People's Bank of China (PBOC) lowered the one-year loan prime rate by 10 basis points to 3.55% from 3.65%, while trimming the five-year rate by 10 basis points to 4.2% from 4.3%.
Geopolitics
In geopolitics we start with an update on the Blinken visit to China. Chinese president Xi actually took the time to meet Blinken on Monday, writes Nikkei Asia. Xi told Blinken in remarks made on state broadcaster CCTV
State-to-state interactions should be based on mutual respect and sincerity. I hope through this visit, Mr. Secretary, you will make positive contributions to stabilizing [the] China-U.S. relationship.
China has no intention of challenging the U.S., Xi said, adding that he expects reciprocal treatment from Washington:
Neither side should try to shape the other side by its own will, still less deprive the other side of its legitimate right to development.
Earlier on Monday, top Chinese diplomat Wang Yi told Blinken that Washington should refrain from interfering in Beijing's internal affairs and lift its unilateral sanctions against his country's science and technology development.
Blinken responded by saying that some of the sanctions on China were meant to prevent certain technologies -- such as hypersonic missiles -- from being used against the U.S.. Blinken said:
We think that they [the sanctions] should be strengthened, but in a way that looks out for our workers and companies ... we must take steps necessarily to protect our national security. If the shoe were on the other foot, I have no doubt that China would do exactly the same thing.
Nikkei Asia quoted one analyst as saying:
We are fairly pessimistic about long-term efforts to put a floor beneath the deteriorating bilateral relations.
And so are we at EPM…
The Reuters perspective on the visit is similarly negative. China and the United States agreed to stabilize their intense rivalry so it does not veer into conflict, but failed to produce any major breakthrough, it says.
All this leaves the world in a situation where military conflict between China and the US remains a real possibility. An ever-increasing possibility even, says Nikkei Asia based on a new report by a bipartisan task force convened by the Council on Foreign Relations. Co-chaired by Mike Mullen, a former chairman of the Joint Chiefs of Staff, and Sue Gordon, a former principal deputy director of national intelligence, the report says an increasingly sluggish Chinese economy could increase the prospect of a military crisis in the Taiwan Strait as Chinese President Xi Jinping may further embrace nationalism. The report also sees no short-term fix, as it also concluded that China was likely entering a long-term economic slowdown, driven by its aging and shrinking population, its crackdown on innovative technology companies and U.S. export controls on advanced technology.
China is preparing to ramp up its drive to promote its own alternative to the West's "rules-based international order", writes Nikkei Asia. Over recent months Xi has rolled out the red carpet in Beijing for leaders like Brazil's Luiz Inacio Lula da Silva, France's Emmanuel Macron and the heads of several Central Asian countries. China has also facilitated Saudi – Iran talks, offered to foster Palestinian-Israel relations, and floated peace proposals for Ukraine. At the core of the Chinese proposal for the world is the Global Civilization Initiative (GCI), or "Xivilization" as state media have termed it. Xi's initiative advocates for "common aspirations" of humanity, pitching a message that says, "Join our club, we won't tell you what to do -- unlike the West." But scholars say collegiality will come at the expense of human rights protections.
Energy Transition & Technology News
Bloomberg carries an article about what governments should do to ensure car batteries are recycled. They should incentivize standardization, to keep the reuse and recycling industry profitable. Governments could also establish a credits system similar to those the EU uses for carbon emissions and the UK for product packaging, making manufacturers pay for battery disposal unless they can transfer the risk to recyclers or investors via tradable securities. Tough landfill taxes would help, too.
The Global Energy Crisis
It’s only June, but Low water is already hampering shipping on most of the Rhine river writes Reuters. The Rhine is an important shipping route for commodities such as grains, minerals, coal and oil products, including heating oil. German companies faced supply bottlenecks and production problems in summer 2022 after a drought and heat-wave led to unusually low water levels on the Rhine. "A look at the current development of the Rhine's water levels brings back memories of the previous year, when there were massive problems for Rhine navigation during summer," Deutsche Bank economist Marc Schattenberg said in a note. The EPM view remains that Europe is in a precarious situation. It’s geopolitical decisions have left its economy walking a tightrope. It needs everything to go right, to avoid falling off. The weather needs to support. China needs to maintain “lower than usual” gas imports. Supplies of energy from other countries (Norway, Qatar, US, Australia) should not be disrupted.
Other
Gideon Rachman of the Financial Times compares the US and EU and their relative strengths and weaknesses. The relationship between the US and its European allies is increasingly lopsided. The US economy is now considerably richer and more dynamic than the EU or Britain — and the gap is growing. This will have an impact well beyond relative living standards. Europe’s dependence on the US for technology, energy, capital and military protection is steadily undermining any aspirations the EU might have for “strategic autonomy”.
In 2008 the EU’s economy was somewhat larger than America’s: $16.2tn versus $14.7tn. By 2022, the US economy had grown to $25tn, whereas the EU and the UK together had only reached $19.8tn. America’s economy is now nearly one-third bigger. It is more than 50 per cent larger than the EU without the UK. Europe that has fallen behind — sector by sector.
The European technology landscape is dominated by US firms such as Amazon, Microsoft and Apple. The seven largest tech firms in the world, by market capitalisation, are all American. Only two European companies are in the top 20 — ASML and SAP. The leading universities that feed the pipeline of tech start-ups in the US are lacking in the EU. The Shanghai and THE rankings of the world’s top universities both have only one EU institution in the top 30.
In 1990, Europe made 44 per cent of the world’s semiconductors. That figure is now 9 per cent; compared with 12 per cent for America. Both the EU and the US are rushing to build up their capabilities. But while the US is expected to see 14 new semiconductor plants come on stream by 2025, Europe and the Middle East will add just 10 — compared with 43 new facilities in China and Taiwan.
Both the US and the EU are looking to turn this situation around with ambitious industrial policies that provide public finance and incentives for chip manufacturers and producers of electric vehicles. But the dollar’s status as the world’s reserve currency gives the Americans the ability to finance their ambitions, without spooking the markets. As one European industrialist puts it: “They can just swipe the credit card.” The EU, by contrast, has a much smaller budget and has only just begun issuing common debt. Private capital is also much more readily available in the US. Europe is now “almost totally dependent on US capital markets”.
Unlike Europe, the US also has plentiful and cheap domestic supplies of energy. European industry typically pays three or four times as much for energy as their American competitors. Gloomy European bosses say this is already leading to factory closures in Europe. Europe’s dominance of lifestyle industries underlines that life in the old continent is still attractive for many. But perhaps that is part of the problem. Without a greater sense of threat, Europe may never summon the will to reverse its inexorable decline in power, influence and wealth. In the view of EPM this is the result of the EU lacking independence of thought in the geostrategic area. And, it means that the EU will become a vassal of the US, if it does not quickly develop real, independent strategic thinking.