Energy, Politics & Money - 20 November 2022
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, we look at:
The IMF assessment that the regionalization of the global economy, caused by the US – China geopolitical competition, is costing the global economy 1.5% of annual growth
Germany’s geopolitical trilemma, of an energy dependency on Russia, coupled with an economic dependency on exports to China, and a geopolitical dependency on the US. The country clearly struggles with getting out of this predicament, and the small efforts in this regard aim at maintaining the geopolitical dependency on the US, which will of course have massive implications for Germany’s economy that you should factor into your scenarios and forecasts for the country
Kevin Rudd’s “five core principles for dealing with China under Xi” & the US warning to the GCC countries that they are not to establish too close bonds with China (coming just as Qatar Energy announced a 27-year SPA for 4 MMT of LNG with China)
The increase in China’s power generation, two-thirds of which is coming from renewables, which confirms the earlier EPM assessment that China’s plans to build out coal fired power generation capacity over coming years is not to provide a base load kind of service, but designed to ensure China has a large amount of capacity in all types of energy, such that it is able to manage disruptions in any kind of energy
The latest IRENA report on hydrogen, which calls for wisdom and clear priority setting in policy making
The (draft text) of the final agreement of COP27, which confirms our initial EPM assessment that the meeting has been about keeping all participants on board with the climate change agenda, as some (especially in the developing world) are close to getting off, rather than pushing the agenda forward
The latest setbacks experienced by Volkswagen and Mercedes in their journey toward electrified transportation & the simultaneous push by Chinese EV manufacturers into Europe
The significantly higher than anticipated cost of Germany’s new LNG import facilities
Bloomberg’s opinion regarding offsetting, and what this means for your decarbonization strategy
General Energy News
Crude oil prices approached 2 month lows during early trading on Monday, as concerns regarding demand due to the global recession and China’s Zero Covid dominate over the supply fears associated with the coming wave of sanctions on Russian crude and refined products, in part because, according to Reuters, European refiners have stockpiled ahead of December 5. Reuters writes Brent crude futures for January hit $87.34 a barrel, while WTI crude futures for December were at $80 a barrel.
Macro-Economics
The IMF has assessed how the geopolitical conflict between the US and China, if it does not escalate from its current state, would affect the global economy, reports Bloomberg. The numbers are massive: 1.5% lower annual growth on a global level, 3.0% lower growth in Asia, all of which translates into $1.4 trillion. EPM views this as a wakeup call for those with business interests in the US-led western hemisphere or China – and that of course means pretty much everyone in business. The regionalization of the global economy is real, and as we mentioned before, will have massive implications that one should be preparing for now. We also note the conflict between the US and China will of course not remain frozen, with the most likely forward path being a worsening through additional trade restrictions, meaning that the eventual impact of the regionalization is most likely to be a multiple of the 1.5% annual GDP growth of the IMF.
Geopolitics
At EPM we have previously discussed “the German trilemma” of an energy dependency on Russia, coupled with an economic dependency on exports to China, and a geopolitical dependency on the US. We noted that that if Germany remains on this course, it is doomed, as its geopolitical partner the US will not allow it to continue its economic relationship with China; the US did not allow Germany to continue its energy relationship with Russia. We feel this is obvious and have long wondered why there is little indication of a German recognition of its predicament let alone a public debate about how to change its geostrategic course. Project Syndicate looks at exactly this question. It argues that there is a lack of long-term strategic thinking in foreign policy in the country; and that in whatever strategic thinking there is, the interests of German corporates dominate. It also does not see in the political arena any evidences that Germany’s leading politicians are willing or able to change this situation, which leaves us at EPM very pessimistic regarding Germany’s shorter- and medium-term outlook.
According to a Reuters report, however, things are moving in Germany – slowly. Based on a confidential government document, it notes that Germany's foreign ministry plans to tighten the rules for companies with deep economic exposures to China and may require them disclose more information and possibly conduct stress tests for geopolitical risks. The document notes, “The aim is to change the incentive structure for German companies with market economy instruments so that reducing export dependency is more attractive” and singles out the chemicals and car industries. At EPM we note this seems to be a German focus on its economic interests – which is something Germany has done for decades and is one of the main reasons the country is now in its trilemma. We also note the objective seems to be to reduce dependency on China, from which one may conclude that Germany’s elites have decided to stick with their geopolitical dependency on the US, and to change energy and economic strategies accordingly. Which will have major implication for the German economy that you should actor into your outlooks and forecasts for the country.
The Sydney Morning Herald features an opinion piece by Kevin Rudd the former prime minister of Australia and one of today’s leading China analysts in the western hemisphere. Rudd has developed “five core principles for dealing with China under Xi” comprised of:
An unapologetic commitment to universal human rights, anchored in international law;
An unapologetic support for the US alliance, though not as an automatic compliance;
Maximising economic engagement to our mutual advantage, such as the resumption of normal tourism and student flows;
Maximum collaboration with China through global institutions on climate change, global economic stability, nuclear non-proliferation and future pandemic management; and,
When we do need to part company with China, do so in partnership with friends and allies.
Bloomberg reports that the US is informing its allies in the GCC about the limits to any relationship with China the US is willing to accept. “There are certain partnerships with China that would create a ceiling to what we can do,” Brett McGurk, the White House’s Middle East Coordinator, told a panel Sunday at the IISS security conference in Bahrain. “It’s simply a fact and that’s the truth here as anywhere else in the world, based upon relationships between countries that are military competitors of ours.” EPM’s view is that this leaves little to the imagination – as we forewarned - that the US – China rivalry will break the global economy apart into two separate blocks, and everyone will be forced to pick sides.
Energy Transition & Technology News
John Kemp of Reuters writes China’s massive deployment of renewable generators is starting to limit its heavy reliance on coal-fired power stations. Total electricity generation increased by 240 billion kilowatt-hours (kWh), or 3.6%, between January and October compared with the same period in 2021, according to the National Bureau of Statistics (NBS). Zero-emissions sources accounted for almost 74% of the total increase in generation, with thermal generators, overwhelmingly coal, contributing just 26%. This is in line with our EPM assessment of China’s plans to build out coal fired power generation capacity over coming years, that this is not to provide a base load kind of service, but really designed to ensure China has a large amount of capacity in all types of energy, such that it is able to manage disruptions in any kind of energy.
The Economist says, “Hydrogen hype is rising again”, and asks the question “will this time be different?”, because it notes “Investors have been excited, and disappointed, before”. It concludes 2023 will be a crucial year. As the world enters recession, many governments and companies will be forced to tighten their belts, which will see many projects in the hydrogen space go under. Only the strong (i.e. truly commercially viable) will survive. Let’s see how many that turns out to be.
The latest IRENA report calls for wisdom when it comes to hydrogen. According to CNBC, “Indiscriminate use of hydrogen could slow down the energy transition” IRENA says, and it calls for “priority setting in policy making”. The first of these priorities, IRENA says, relate to the decarbonization of “existing hydrogen applications.” The second centered around using hydrogen in “hard-to-abate applications” like aviation, steel, shipping and chemicals.
Climate Politics
Countries agreed early Sunday at the COP27 climate summit to set up a fund to help poor countries being battered by climate disasters, writes Reuters. After tense negotiations that ran through the night, the Egyptian COP27 presidency released a draft text for an overall agreement - and simultaneously called a plenary session to gavel it through as the final, overarching agreement for the summit. At EPM we note the draft text kicks many of the most controversial decisions on the fund, such as who would contribute, what and how, into next year to COP28. The draft text also does not discuss a step forward in climate politics. This really shows, in our view, that in line with our original assessment, the focus on the meeting has been on keeping all participants on board with the climate change agenda, rather than pushing the agenda forward, as some (especially in the developing world) are close to getting off.
The Electrification of Transport
Bloomberg reports the electrification plans of Volkswagen and Mercedes are experiencing major setbacks. Volkswagen’s Trinity project is delayed, due to issues at the company’s software-development unit, Cariad. That subsidiary has been beset with disruptions and mis-management that had already pushed back the release of the Audi Artemis – the company’s luxury answer to Tesla – by three years to 2027. The latest problems of Cariad could lead to the carmaker scrapping plans for €2 billion factory in Germany, and a further widening of the gap between Volkswagen and Tesla when it comes to autonomous driving. Mercedes cut prices on its flagship EQS EV in China by about $33,000 after misjudging the market.
While the leading European car companies are struggling in their electrification strategy, the Chinese are pushing forward fast – not only in China but also in Europe! Reuters reports, Chinese electric vehicle (EV) makers have set their sights on winning over European drivers and large corporate customers with more affordable cars that come with top safety ratings and lots of high-tech features. The report says high demand for electric cars amid supply chain shortages has allowed European carmakers to raise EV prices and focus more on retail clients, rather than customers such as car rental firms that have traditionally been less profitable for them. That has created a window of opportunity for Chinese EV makers that have already stolen a march on most foreign rivals in China, by far the world's biggest market for EVs.
The Global Energy Crisis
Last week we reported on Germany delivering the first of its new LNG import facilities, which was brought online in record time, and will help the country deal with the decrease in natural gas flows from Russia. Of course, the shift away from Russia, under tight deadlines, comes at a cost. Reuters reports the purchase and maintenance of floating liquefied natural gas (LNG) terminals will cost more than 3 billion euros ($3.10 billion) more than planned. Overall, the costs are estimated at about 6.56 billion euros, compared with 2.94 billion euros estimated in the country’s 2022 budget. In response, at EPM we believe this highlights an important distinction we made at the start of Europe’s natural gas crisis. At that time, everyone was focusing on whether or not Europe could secure alternative, non-Russian supplies. We said that an additional focus should be the cost at which these supplies are secured. Clearly, no supply is disruptive to society and devastates the economy. But securing supplies at a price that is unaffordable for household and business is equally disruptive and devastating! The situation in Europe today is that supplies appear to have been secured for this coming winter, but at all-in price levels that make large segments of European industry uncompetitive at global level.
According to a Bloomberg report, Germany should not expect any let off on LNG imports over coming years, for Japan warns that global competition for liquefied natural gas is set to intensify over the next three years. Long-term LNG contracts, which offer stable pricing and reliable supply, that start before 2026 are sold out. This means importers will be forced to depend more on the volatile and expensive spot market, which is currently trading nearly three times higher than long-term contracts. And which, we at EPM highlight, should be expected to continue trading at historic highs because of a lack of supply in the term-contract space.
The Financial Times reports on the public backlash to all this that continues to loom in Europe. “Rallies (against the European stance regarding the Ukraine War, Russia and the US) have taken place in dozens of towns and cities across eastern Germany. Most are attended by a few hundred people, many by just dozens. But as with similar rallies elsewhere in central and eastern Europe, they point to a worrying trend for the region’s political mainstream”, it writes.
ESG
Bloomberg again highlights what is likely to happen to you if your decarbonization strategy depends on offsetting. “Dozens of the biggest global companies — from banks to industrial heavyweights — have made bold climate claims justified by cheap renewable-energy offsets that don’t counteract global warming”, it writes in its latest article on the subject of offsetting.