Energy, Politics & Money - 2023.08.07
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we take a closer look at the Ukrainian Summit that took place in Saudi Arabia over the weekend. We want to explain why we believe a deep understanding of geopolitics is so important for those active in the market. Over the past 12 to 24 months, there has been a lot of talk about a global realignment of alliances, with Saudi leaving the US camp to join China and Russia, which is said to be a first step toward a dumping of the dollar for international trade. The summit in Saudi explains why we at EPM believe you will lose a lot of money if you position yourself in the market on the basis of these naïve narratives, which result from a lack of understanding of geopolitics, shallow analysis of geopolitical events, and/or active misguidance of public opinion by interested parties. In our view, the US has been very successful in the geopolitical realm, creating problems and obstacles for competitors that force these competitors to accede to US leadership. And, we explain, the Jeddah Summit indicates China could well be the next US adversary that suffers this fate, the end result of which would be a strengthening of the US hegemonic position.
Furthermore, we look at:
The OPEC+ decision to leave policy unchanged, as Saudi rolled over its voluntary production cut into September
The growing influence of US crude oil on the international crude oil market
The attack on a Russian tanker carrying fuel oil in the Black Sea near Crimea over the weekend, likely by a Ukrainian sea drone, which will result in significantly higher insurance and shipping costs for Moscow
The seven charts that explain just how much trouble the European economy is in
The root causes for the growing anti-West sentiment in the Global South
Why, according to some geopolitical analysts in the West, Washington is not interested in pursuing peace in Ukraine
New Zealand’s defense policy, which seems to indicate it wants to join the US alliance targeting China
The attempts by the world’s biggest mining companies to shift towards copper
Why China was able to become the world’s largest exporter of cars, ahead of Japan: EVs
General Energy News
An OPEC+ ministerial panel which met on Friday made no changes to the group's current oil output policy, after a Saudi decision to extend its voluntary production cut into September helped oil prices rally further, Reuters writes.
As to the Saudi Arabian production cut extension until the end of September, the Financial Times says Russia will in parallel cut oil exports next month by 300,000 b/d. The Saudi cut could also be extended or “deepened”, it says, based on a Saudi state news statement last Thursday, which in turned cited the country’s Ministry of Energy.
Meanwhile, a surge in US crude oil exports is affecting markets in Europe and Asia, writes Reuters. US crude exports have averaged 4.08 million barrels per day so far in 2023, up from an average of 3.53 million bpd in 2022. This is easing the loss of supply after Saudi Arabia deepened output cuts from July, above what major producers agreed to in June, and illustrate the increasing influence of crude from the U.S., the world's biggest oil producer, in the global market. And because WTI is freely traded, without destination and output restrictions, it is becoming more of a price setter for other grades of crude oil, Reuters says.
Lastly, a Russian tanker carrying fuel oil was attacked in the Black Sea near Crimea over the weekend, writes S&P Global. The Sig tanker was struck just outside the Kerch Strait, which connects the Black Sea and the Sea of Azov, separating Crimea and Russia's Taman peninsula. The vessel was likely hit by a Ukrainian sea drone. Significantly higher insurance and shipping costs are now likely to follow for Moscow, writes Bloomberg.
Macroeconomics
The numbers don't lie, the EU economy is having a difficult time, Politico says. While unemployment remains low, economic growth too is low while inflation remains high despite the absence of an energy price increase this year. Critical in the EPM view, is the fact that credit demand is down – way down! – across the continent, approaching 50% for corporate credit and 75% for household mortgages. We believe the resulting decline in demand will trickle through the economy over coming quarters.
Geopolitics
Global South nations are increasingly unhappy with the current world situation and could join hands to seek a change, writes Nikkei Asia. Consequently, it may be the West -- not China nor Russia -- that will find itself isolated in the future, it says. The war in Ukraine brought this reality to the forefront. From the start, the world has been divided into three camps: Western, China-Russia and neutral. A survey report released in March by the Economist Intelligence Unit, the research arm of the U.K. magazine Economist, showed that the number of countries actively condemning Russia or taking a Western-leaning position had declined from 131 to 122 over the past year, while the number of countries backing Russia or taking a pro-Russian stance had risen from 29 to 35. The countries that had shifted positions to become supportive of Russia or Russia-leaning are South Africa, Iran, Uganda, Mali, Burkina Faso and Bolivia -- all Global South countries.
Nikkei Asia says the Kigali Global Dialogue that took place in Rwanda from June 12 to 14 provides insight into what is the root cause of this geopolitical trend.
Many emerging and developing economies in attendance there expressed the opinion that the current international system, led by the US and Europe, does not reflect their views sufficiently.
Many Global South officials and pundits feel their countries' stability has been jeopardized by rising energy and food prices caused by sanctions on Russia.
The West's "double standards."
This is the reality that - we at EPM believe - lies behind the Ukraine Summit that took place at the Jeddah Summit in Saudi Arabia over the weekend. General reporting on the summit explains why we at EPM believe you will lose a lot of money on the markets if you base your position on what is commonly said and discussed. According to Reuters, the summit was “part of a diplomatic push by Ukraine”. This is nonsense. The summit was announced the day after US National Security Advisor Jake Sullivan visited Saudi Arabia, and as such is part of a larger US geopolitical plan. This key event surrounding the summit clearly indicates it is not a Ukrainian initiative (no Ukrainian official visited Saudi in the run up to the summit), nor an independent Saudi initiative. Reuters is correct when it says the US objective for the summit was “to build support beyond its core Western backers by reaching out to Global South countries that have been reluctant to take sides in a conflict that has hit the global economy”. As such, we at EPM note, it was not really a peace summit, although it was commonly branded in this manner by the media. A real peace summit looks for a compromise solution.
This summit was about gathering support for one specific opinion regarding the war in Ukraine and one specific solution. This one specific opinion is the US position of “the rules-based international order”, as that was the basis for discussions; and this one specific solution too is the US solution of “territorial integrity and sovereignty of Ukraine”, meaning a complete defeat of Russia on the battlefield before any negotiations are launched. This is very obvious, based on recent commentary and discussion in Foreign Affairs, writes the National Interest in an article entitled “Washington Has No Interest in Pursuing Peace in Ukraine”. Washington will not accept anything less than total Russian collapse as an end to the war, it says, as all possible pathways to negotiations are discarded or argued against in Foreign Affairs, it notes, which leaves as the only option on the table, fighting until the very last Ukrainian.
The attendance of China at the summit was hailed as an example of Saudi Arabia’s growing international clout, and the result of its conscious decision to move beyond “the old framework of its relationship with the U.S.”, writes Reuters. Again, this is a clearly incorrect reading of what has happened. The Wall Street Journal revealed that the Saudi’s had been “picked to host partly in hopes of persuading China to participate”. In other words, Jake Sullivan told the Saudi’s to organize this event when he visited them two weeks ago. The US interest is in driving a wedge between China and any international ally it might have. The US needs an “independent party” to do this, as China and its allies do not trust anything the US says or recommends. As such, we at EPM believe the Saudi’s are being used by the US to influence China in the way that the US wants to influence it. That is why we believe the US has asked or allowed the Saudi’s to reach out to China and increase economic relations, such that now it can use this relation to influence China in the manner that the US would like it to be influenced. Reuters says China “feels far more comfortable joining the effort in Saudi Arabia”, contrasting that to the country’s refusal to join an earlier NATO led summit on Ukraine held in Denmark. And indeed it decided to send a delegation to Saudi, writes Bloomberg.
The US plan seems to have worked. According to the Wall Street Journal, national security adviser Jake Sullivan and Undersecretary of State for Political Affairs Victoria Nuland met with the head of the Chinese delegation, Beijing’s peace envoy Li Hui, on the sidelines.
“It was very good to have the Chinese here,” it quoted a US official as saying. In Jeddah, the major developing countries appeared keener to seek out a consensus. Since the discussions are taking place on the basis of the Ukrainian “peace proposal”, which according to Eurasian Times reads more like a “a formula suggested by a victorious party for the vanquished one” than a peace proposal, this progress in the process to build a consensus effectively means that countries are being won over by the US narrative regarding the war in Ukraine.
So what should you take away from all of this?
As geopolitics is becoming ever more important in global business, you need to ensure you have the proper understanding of what is going on.
You cannot rely on what is commonly reported. You need independent analysis by trusted experts. Otherwise you will be betting on a collapse of the US built world order and an end of the petro-dollar, when in reality the US is succeeding in extending its hegemony.
That is our main EPM take away from the Ukraine summit in Jeddah. The US is very shrewdly managing its interests in the geopolitical realm, creating problems and obstacles and challenges for others, that will eventually force those others to submit to the US. Russia very clearly is in trouble as a result of its invasion of Ukraine. The EU is in trouble by following the US narrative around the Russian invasion of Ukraine. And China fears a weakening of its ally Russia, as this will weaken itself, but it does not know how exactly to solve this problem, which leaves it exposed to falling into a US geopolitical trap (or sphere of influence) as well.
The comments by Victor Gao, former translator for Deng Xiaoping, currently vice-president of Beijing-based think tank the Centre for China and Globalisation, and commonly regarded as a spokesperson for the Chinese Communist Party when it comes to international affairs, indicate this might well be happening. According to the South China Morning Post, he said: “Saudi Arabia will not do one thing that will be considered by Russia as anti-Russia, because it is not in its fundamental interests. I don’t think Saudi Arabia will become a puppet of the United States to help it achieve its strategic goals.” And the Guardian reports that China is okay with continuing talks, although these are taking place on the basis of the US vision and not the Chinese one.
Further as to China, New Zealand’s defense policy indicates it wants to join the US alliance targeting China, says Responsible Statecraft. China is mentioned by name in the new documents only around a dozen times, but it’s crystal-clear that Beijing is the main target of New Zealand’s updated blueprint. Its authors argue that Beijing is becoming “more assertive and more willing to challenge existing international rules and norms” — and is employing “economic coercion” to achieve its aims. Which, EPM notes, is a line straight out of the US script when it comes to China. A key theme threading through the just-announced plans is the idea that New Zealand needs to “partner” with “like-minded countries.” The National Security Strategy suggests these are predominantly Five Eyes and Western nations, including Australia, the United States, United Kingdom, Canada, EU members, Japan, and South Korea. Unsurprisingly, China does not make the cut. A major theme of the new Defence Policy and Strategy Statement is a drive for New Zealand’s military to become “combat-capable” and expand its activities in the contested Pacific region located immediately to New Zealand’s north. It’s clear from the text that “improving the effectiveness of our combat and other military capabilities” will mean spending a lot more on both personnel and new military hardware.
Energy Transition & Technology News
The world’s big mining companies are thinking through how they can shift their portfolio towards copper, writes the Financial Times. Copper is “the metal of electrification”, as a result of which demand is expected to double to about 50mn tonnes annually by 2035 as the world transitions to cleaner energy for cars and industry. Rio Tinto, which derives the majority of its profit from iron ore production, is considering more spending on exploration and processing of copper. It is also developing new technology to extract metal discovered decades ago but thought too deep or risky to mine. Some of the world’s biggest mining groups, such as Australia’s BHP, Swiss-based Glencore and Newmont of the US, are also weighing up plans to expand their production of copper.
The US government lab that last year reached a long-sought milestone in nuclear fusion — achieving a controlled reaction that yielded more energy than it took to produce — has repeated the achievement, writes Bloomberg. EPM discussed the original achievement of the Lawrence Livermore National Laboratory near San Francisco which a cautionary note, namely that its definition of “net energy gain” was based on a very limited definition of the energy input, the energy delivered by the laser rather than the energy used to power the laser. Still, in our view the original result was a major step forward in nuclear fusion, and the repeat of that original result is another major step forward. Both leave nuclear fusion decades away from commercial usage, however.
The Electrification of Transport
China became the world leader in automobile exports in the first six months of 2023, surpassing Japan for the first time, writes Nikkei Asia. Chinese automakers exported 2.14 million vehicles from January to June, up 76% on the year. Japan lagged at 2.02 million, for a gain of 17% on the year. Behind China’s stellar performance are electric vehicles. China's exports of new energy vehicles, which include EVs, plug-in hybrids and fuel cell vehicles, more than doubled in the January-June half to reach 25% of the country's total auto exports. Tesla, which uses its Shanghai plant as an export hub for Asia, exported more than 180,000 vehicles, while its leading Chinese rival BYD logged exports of more than 80,000 autos.