Energy, Politics, & Money - 2023.08.14
In this roundup, we look at:
The IEA view on oil prices in 2023 (bullish) and 2024 (bearish)
Why economic historian Niall Ferguson doesn’t believe in the “smooth landing” hypothesis for the US economy
The Chinese government’s response to the US ban on tech-investment in China; and that of China’s leading corporations
The informal/formal visit by Taiwan Vice President William Lai to the US
The relationship between China and the Middle East, and the US perspective on the subject
The US government’s support for Direct Air Capture, to the tune of $1.2 billion
The lobbying efforts by the UAE in the run up to COP28, which aims at educating elite audiences in the West, influencing elected officials, and deflect negative press reports
The lobbying efforts by the US agricultural industry, airlines and oil companies, to expand the definition of sustainable aviation fuels, such that ethanol qualifies for IRA subsidies
The approaching death of the Net-Zero Insurance Alliance, due to a looming anti-trust case against it in the US
The warning that Germany’s energy security situation remain precarious, and continues to face gas shortages until 2027
The idea of recycling plastics into construction materials, regarding which it remains unclear if it helps the environment, or that infrastructure is structurally sound
The ‘decisive lead taken by China in battery technology
The faster than expected build out of solar power across the EU
General Energy News
Crude oil prices ended last week up again, for a 7th consecutive week now, writes Reuters. Brent crude futures settled at $86.81 a barrel, while WTI settled at $83.19, both approximately 0.5% higher than the end of the previous week.
Looking further out into the medium term, the International Energy Agency (IEA) believes the OPEC+ production restraint is likely to reduce inventories during the remainder of this year, and thereby support oil prices. The IEA said if OPEC+ current targets are maintained, oil inventories could draw by 2.2 million barrels per day (bpd) in the third quarter and 1.2 million bpd in the fourth, "with a risk of driving prices still higher". But, writes Reuters, next year, oil demand growth is expected to slow sharply, to just 1 million bpd, due to weak macroeconomic conditions, a post-pandemic recovery running out of steam, and the burgeoning use of electric vehicles. This IEA view contrasts with that of OPEC, which believes oil demand will rise by a much stronger 2.25 million bpd in 2024.
Macroeconomics
Over at Bloomberg, economic historian Niall Ferguson explains why he doesn’t believe in the “smooth landing” hypothesis for the US economy. “The most recent inflation data might seem to suggest that I and others were wrong to warn of a reprise of the 1970s”, he says. But then too, he notes, the dream of pain-free disinflation was a recurring delusion. In the end, the only times the Fed succeeded in bringing inflation down in that decade there were recessions: in 1970, 1974-75 and 1980. As to where the US is likely to head this time around, headline inflation has come down rapidly, considering that it was above 9% in June last year, and this has been achieved without any of the labor market pain usually associated with a recession. The unemployment rate is back down to where it was before the pandemic, a historic low of 3.5%. This has been achieved by very loose fiscal policy in the US, in no small part due to the CHIPS Act and IRA. Currently running at 6.5%, as the recent downgrade of the US’s credit worthiness indicated, this can not last forever. Both government and companies are about to experiencing a significant increase in the cost of debt service, as older debt expires and needs to be refinanced at significantly higher rates. Therefore, Ferguson, says, this decade will not be identical to the 1970s, nor will it replicate the experience of the 1920s or the 1940s. But, “the idea that we can recover from the fiscal and monetary excesses of the past three years without economic pain — at a time of political polarization and geopolitical conflict — seems historically implausible”.
Geopolitics
The US has called its latest curbs on tech investment in China a “small yard” with a “high fence”. A description meant to send the message that the United States only wants to de-risk, not decouple, from China, writes the South China Morning Post. But, on the day of the announcement the Chinese foreign ministry was quick to protest over the restrictions, labelling them “outright economic coercion and tech bullying” designed to “deprive China’s development rights” in the name of national security. China’s Ministry of Commerce also pledged to “preserve its own interest resolutely”, reserving its “rights to take actions”. While it is not sure if China will respond with countermeasures, nor what these countermeasures could be, what is sure is that the subject will top the agenda of the upcoming visit to China by US Commerce Secretary Gina Raimondo – making an improvement of relations between the two countries all the more unlikely.
Chinese companies are responding to the new geopolitical environment by stepping up investments to develop products on their own, writes Nikkei Asia. Companies listed in China spent 1.64 trillion yuan ($228 billion) on research and development programs in 2022, marking a 2.6-fold increase over the past five years.
Taiwan Vice President William Lai arrived in New York on Saturday, writes Reuters. Lai is the front-runner to become Taiwan's president in elections in January. Officially, his visits to the US are “stopovers” that are part of a trip to Paraguay. But the reality is that the stop in New York, and a later expected stop in San Francisco, are part of a diplomatic engagement. Before leaving, Lai wrote in English on X that he was "excited to meet with US friends in transit". China responded angrily to the stopover, fundamentally because it goes against the “One China” policy, under which only the CCP represents the Chinese people of mainland China and Taiwan. In the Chinese view, diplomatic relations between Taiwan and the US are an element of broader efforts make Taiwan independent from mainland China. China's foreign ministry said it opposed any form of visit by "Taiwan independence separatists" to the United States, that "Lai stubbornly adheres to the separatist position of Taiwan independence and is a troublemaker through and through", and that Beijing would take strong steps to protect its sovereignty, Reuters writes.
Asia Times look at the relationship between China and the Middle East. It is purely economic, it concludes. China wants the Middle East’s crude oil and natural gas, and for that reason wants to see political stability. Furthermore, it wants to exports its own products to the Middle East. China is not challenging the US’s leadership position in political and military affairs in the region. EPM is reminded of what the US top official for the Middle East, Brett McGurk, said at the at the Manama Dialogue in 2022. He warned the nations in the GCC to limit their relations with China to economic relations, saying that growing co-operation with China would put a “ceiling” on relations the countries could have with the US. Together it explains why we do not buy into the view that China’s closer trade ties with for example Saudi Arabia are indicative of a shift by Saudi Arabia away from the US. In reality, the US does not mind a trade relations between the GCC and China (as long as this doesn’t involve semiconductors or other high-tech sectors of the economy, but the GCC has no capabilities in any of these area), because the US controls the region politically and militarily. Meaning it can cut China off the GCC whenever it wants. For this reason we actually believe the US would like China to become more trade dependent on the GCC.
Energy Transition & Technology News
The US Department of Energy announced today that it’s providing $1.2 billion to develop regional hubs for Direct Air Capture, writes MIT Technology Review. The first recipients will include Occidental Petroleum’s proposed carbon-removal project in Kleberg County, Texas, dubbed the South Texas DAC Hub, as well as a partnership between Battelle, Climeworks, and Heirloom to develop facilities in southwestern Louisiana, known as the Project Cypress DAC Hub. Those two projects will capture and store away at least 1 million metric tons of carbon dioxide per year. This represents a first tranche of $3.5 billion in funding allocated under the Bipartisan Infrastructure Law to set up at least four regional DAC hubs. The Department of Energy estimates that the US alone will need to remove from the air, or capture from plants, some 400 million to 1.8 billion metric tons of carbon dioxide annually for the nation to reach its goal of achieving net-zero emissions by 2050.
The funding for DAC hubs is a bet that bringing companies together in central locations can supercharge innovation, improving the machines that capture carbon from the air, writes Bloomberg.
The idea of recycling plastics into construction materials has been around for a while. At first sight, it seems like a good idea. Shred discarded plastic into tiny pieces and reprocess it into everything from roads and bridges to railroad ties. Many test projects have been completed in recent years, with proponents touting them as a convenient way to divert plastic waste from landfills while also making infrastructure lighter, more rot-resistant, or, ostensibly, more durable. But, Grist writes, several reports and literature reviews have highlighted the unknown health and environmental impacts of repurposing plastic into construction materials. Microplastics could potentially slough off of plastic-infused infrastructure, and plastic chemicals could leach from plastic-infused construction materials into nearby waterways. Other analysis warn that post-consumer plastic isn’t desirable for use in many types of infrastructure, as plastic-infused materials have lower strength and stiffness, greater vulnerability to UV degradation, and a propensity to crack.
Explosive growth in solar power means most EU countries will hit their 2030 renewable energy targets ahead of time, writes Politico. The bloc added 41 gigawatts of new solar capacity in 2022 — a 40 percent increase on 2021. That's expected to rise to over 50 GW this year. “[Solar] development has been spectacular,” said Javier Esparrago, an energy expert at the European Environment Agency, arguing that the fast rollout ultimately “all boils down to [the] costs” of solar power per kilowatt-hour plummeting 90 percent in the past decade.
Climate Politics
The United Arab Emirates has hired a team of lobbyists to defend the country’s work in hosting this year’s UN climate summit after criticism from environmentalists and politicians, writes the Financial Times. Public relations firm First International Resources will receive a monthly retainer of £100,000 for six months to strengthen the UAE’s reputation among “Western audiences”, according to a copy of its contract filed with the US Department of Justice under lobbying rules for foreign agents. First International’s goal is to “inoculate” COP28 and Jaber from “any potential criticism” and drum up support from “politically influential individuals”. According to the contract, FIR will survey the general public and “elite” audiences in the US, France, Germany, the UK, Spain and three other countries. It will use the results to generate a “proactive educational campaign” and influence elected officials. It will seek to enlist “politically influential individuals and groups” to “further bolster COP28’s overall image and interests”. The contract listed the World Economic Forum, the Carnegie Endowment for International Peace and the Center for Strategic and International Studies among the think-tanks it could target. Additionally, the contract said the consultancy “could also activate or mobilise our connections inside the ‘US Jewish Establishment’ to help support the campaign’s overall objectives”, as well as using its influence to set up meetings with members of the US Congress and the administration of President Joe Biden.
More on PR and lobbying regards the US biofuels industry, the world’s largest. It was supercharged by a 2007 law that forced blending increasing amounts of ethanol into petrol. The industry now faces the threat of declining demand, however, as more battery-powered cars arrive on American roads. With airlines in need of a product and biofuel refiners looking for a new market, they have allied to include ethanol in the plane fuel mix, writes the Financial Times. The lobbying campaign is centred on tax credits for aviation fuel established in the Inflation Reduction Act, the landmark climate law signed by President Joe Biden a year ago. The credits are worth $1.25 a gallon for fuels that reduce emissions by at least 50 per cent compared with jet fuel, and up to $1.75 per gallon for further reductions. Carriers such as United Airlines and Alaska Airlines have joined farm groups, US biofuel refinery owners such as Archer Daniels Midland and Green Plains, and international oil companies including BP and Shell, to push federal tax officials to embrace an analysis of greenhouse gas emissions that would make ethanol eligible for these generous tax credits.
The future of the Net-Zero Insurance Alliance, a UN-backed group of insurers that promised to shrink the emissions linked to their underwriting, is in doubt, writes the Financial Times, because 23 Republican state attorneys-general in the US say that by setting joint targets the alliance violates antitrust laws. This has already led to an exodus from the group – AXA, Swiss Re, among others. Only Italy’s Generali and the UK’s Aviva are now left of its eight founding members.
The Electrification of Transport
The Financial Times looks at the battery race. Invented in the 1970s by US-based scientists and commercialised in 1991 by Japan’s Sony to power its Handycam video cameras, lithium-ion cells pack far more punch in smaller and lighter units than the lead acid or nickel cadmium units that previously dominated the rechargeable battery market. Advanced material innovations have led to a range of lithium-ion batteries, catering not only to different applications but also the characteristics desired by a car manufacturer or utility. These include cost, weight, driving range, charging time, the number of charging cycles before failure, and safety. In the electric car market two main cathode chemistries are fighting it out: NMC, which uses lithium, nickel, manganese and cobalt in varying quantities, and LFP made of lithium, iron and phosphate. South Korean manufacturers LG Energy Solution and Samsung SDI excel at producing NMC cathodes, which are used in the majority of electric vehicles sold in the west where their longer range is better suited to driving habits. But Chinese companies still account for 75 per cent of global production. China is almost totally dominant in LFP batteries, accounting for 99 per cent of world output. The technology has taken the country by storm thanks to improvements in energy density, its higher safety levels and its lower cost compared with cells containing cobalt and nickel, as well as manufacturing breakthroughs. In taking the LFP lead, Chinese manufacturers have developed means of producing the technology cheaply and at scale.
The Global Energy Crisis
For now, German gas stockpiles are “developing positively” and are nearly 90% full, but a cold winter could still put Germany’s energy security at risk, writes Bloomberg. The country will need to add more gas infrastructure, the country’s gas storage operators group INES says, as otherwise it will continue to face a risk of severe gas shortages until early 2027. “The danger of gas shortages during cold temperatures remains and will continue to accompany us until winter of 2026/2027 unless further infrastructure measures are taken,” said INES’s head Sebastian Bleschke.