Energy, Politics, & Money - 2023.08.09
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we look at:
The higher than expected growth in US oil production; and the outlook for global oil production, which is further growth in 2024 despite OPEC+ production restraint
ADNOC’s new push into M&A to establish a larger global presence
The significant increase in loan defaults in the US
Consumer and producer price deflation in China, which indicated the weakness of demand in the country’s economy
China’s growing lead in three measures of the quantity and quality of scientific research papers
The increase in tension between China and the Philippines over the Second Thomas Shoal
The US plan to achieve normal diplomatic relations between Israel and Saudi Arabia
Tesla’s significant dependency on China for its battery supply chain
The pushback by US power plant owners against the Biden administration’s sweeping plan to slash carbon emissions from the electricity sector is unworkable, arguing it relies too heavily on costly technologies that are not yet proven at scale, i.e. CCS and hydrogen
The failed efforts by the 8 countries of the Amazon region to agree on a common goal for ending deforestation in the world’s largest rainforest
The urgent appeal by the CEO of German petrochemical company Lanxess to his nation’s politicians, to urgently address the issues of too high energy prices and too much bureaucracy, which makes Germany’s petrochemical industry uncompetitive
General Energy News
US oil production this year will rise faster than previously expected, writes Bloomberg. Higher-than-expected well productivity and rising crude prices will help boost US production to a record 12.8 million barrels a day in 2023, up from a previous forecast of 12.6 million, according to a monthly report from the US Energy Information Administration released Tuesday. The US averaged about 11.9 million barrels a day in 2022. Production in both the US and globally is forecast to increase further next year. World output will grow to 103 million barrels a day in 2024, up 1.7 million barrels per day from this year, the EIA said. Over 70% of that growth is expected to come from non-OPEC countries, led by the US, Brazil, Canada, Guyana and Norway. US output will climb to 13.1 million barrels a day next year, the agency said.
The Abu Dhabi National Oil Company (ADNOC) has amassed a nearly 50-strong team of dealmakers and is pursuing roughly $50bn in transactions as part of a push to diversify its business and expand abroad, writes the Financial Times. ADNOC, led since 2016 by Sultan al-Jaber, has quietly assembled a suite of Wall Street talent. The investment team, run by former senior Morgan Stanley executive Klaus Froehlich, has become one of the most important units for the company’s strategy, with insiders describing it as akin to an “internal investment bank”. The group is currently pursuing deals simultaneously with Brazilian petrochemical maker Braskem, Austria’s OMV and German chemical company Covestro. It has also teamed up with BP to launch a $2bn bid for a 50 per cent stake in an Israeli natural gas group as part of a plan to jointly pursue gas projects in the eastern Mediterranean, and recently announced it had taken a 30 per cent stake in an Azerbaijan gas field, giving the group a foothold in pipeline supplies to the EU.
Macroeconomics
US banks suffered almost $19bn of losses on soured loans in the second quarter, the highest level in more than three years as lenders contend with rising defaults among credit card and commercial real estate borrowers, writes the Financial Times. This represents an increase of almost 17 per cent on the previous three months and 75 per cent higher than the same period last year. The jump in loan losses comes as borrowers with floating-rate loans are facing higher repayments after the Federal Reserve implemented an aggressive string of interest rate rises to combat soaring inflation. US banks are preparing for loan losses to continue rising. During the second quarter, they collectively put aside an additional $21.5bn of provisions to cover future loan losses.
China's consumer prices fell into deflation in July, while factory gate prices extended their declines, as the world's second-largest economy struggled to revive demand, writes Reuters. The consumer price index (CPI) for the month dropped 0.3% year-on-year. The producer price index (PPI) fell for a 10th consecutive month, down 4.4% from a year earlier after a 5.4% drop the previous month. Pressure will now be mounting for authorities to release more direct stimulus.
Looking at what will drive the global economy longer term, China has maintained its global lead in three measures of the quantity and quality of scientific research papers, writes Nikkei Asia, which indicates that the country is increasingly independent from the West when it comes to research. China has ranked first in the share of published papers since 2017, first in the share of top 10% most-cited papers since 2018, and first in in the share of the top 1% most-cited papers since 2019. Based on 2020 data, China produced 24.6% of all papers published worldwide -- a margin of 8.5 percentage points above the US -- and nearly 30% of the top 10% and 1% most-cited publications. Some observers argue these results look better than they really are, because Chinese domestic researchers cite each other's work. 29% of citations of US papers were by American researchers, while the share of citations by domestic peers came below 20% for Japan, South Korea, the U.K., Germany and France. China was strikingly higher at 61%, up from 48% a decade earlier. But this does not change the fact that China's research capabilities are not to be underestimated, as Chinese research is also widely cited outside of China.
Geopolitics
The tension between China and the Philippines over a disputed shoal in the South China Sea is heating up. The Second Thomas Shoal, which lies within the Philippines exclusive economic zone, is home to a handful of troops living aboard the former warship Sierra Madre. Manila deliberately grounded the vessel in 1999 to reinforce its sovereignty claims. China claims a historic right to the shoal. So while simmering for longer, the pivot by Philippine President Ferdinand Marcos Jr back to the United States is the root cause of the current increase in tensions, writes Reuters. Chinese coastguard is now blocking resupply missions to the Philippine troops at the shoal. On August 5 it sprayed a Philippine vessel with a water cannon for this reason. China claims sovereignty over almost the entire South China Sea, which overlaps with the exclusive economic zones of Malaysia, Vietnam, Brunei, Taiwan and the Philippines.
In the Middle East, after months of shuttle diplomacy between Washington and Riyadh, the shape of the Biden administration’s blockbuster plan to normalise relations between Israel and Saudi Arabia — and in doing so reshape the region’s geopolitics — is coming into view, writes the Financial Times. The terms are that Saudi Arabia would open formal relations with Israel, in exchange for Riyadh receiving more US defence support and assistance on a civil nuclear programme. The reason for this US push, part of the Abraham Accords, is that it should enable the US to spend more of its time, money and efforts on countering China and Russia.
Climate Politics
US power plant owners warned the Biden administration on Tuesday that its sweeping plan to slash carbon emissions from the electricity sector is unworkable, relying too heavily on costly technologies that are not yet proven at scale, writes Reuters. Top utility trade group the Edison Electric Institute (EEI) asked the US Environmental Protection Agency (EPA) for revisions of the proposed power plant standards, which hinge on the widespread commercial availability of carbon capture and storage (CCS) and low-emissions green hydrogen, adding the agency's vision was "not legally or technically sound."
Eight Amazon nations failed to agree on a common goal for ending deforestation in the world’s largest rainforest, writes Reuters. Brazilian President Luiz Inacio Lula da Silva, who has staked his international reputation on improving Brazil's environmental standing, had been pushing for the region to unite behind a common policy of ending deforestation by 2030 - one he has already adopted. But the joint declaration issued on Tuesday in the Brazilian city of Belem created an alliance for combating forest destruction, with countries left to pursue their own individual deforestation goals.
Developed nations have to make good on their promise to provide $100 billion a year in financing to help emerging-market countries combat climate change, according to Majid Al Suwaidi, the director general of the COP28 climate summit that will take place in Dubai this year, Bloomberg writes. “This is something that was promised a long time ago and needs to be delivered,” said Al Suwaidi. “We need to pull out all the stops.” EPM has mentioned before that what is happening is a shift in the conversation from grants to achieve $100 billion, which was the original promise, to public and private “for profit” financing.
The Electrification of Transport
Nearly 40% of the suppliers for materials used in Tesla's electric vehicle batteries are Chinese companies, a Nikkei Asia analysis has found, highlighting the leading role China plays in the EV segment of transportation. China was the largest supplier of materials for the lithium-ion batteries used in Tesla's EVs, constituting 39% of the 61 companies in the "storage battery" category. China accounted for 40% of the 42 firms engaged in "nonferrous smelting" excluding aluminum smelters. Chinese companies also held the top share, at 33%, among the 102 suppliers in the "inorganic chemistry" group. US companies constituted 22% of the number of Tesla suppliers overall, while Chinese firms accounted for 17%.
The Global Energy Crisis
Reuters writes that Matthias Zachert, CEO of German petrochemical company Lanxess, which makes high-end specialty chemicals such as additives, lubricants, flame retardants and plastics has called upon the German government to offer support to the German petrochemical industry. In a statement Zachert said, “We urgently need sustainable framework conditions – above all an internationally competitive electricity tariff for the industry". Lanxess will cut costs, and shut down two energy intensive facilities in order to survive for now. "But that is not enough. Politicians need to finally wake up," said Zachert, calling for reduced bureaucracy and faster approval procedures to make Germany more competitive.