Energy, Politics, & Money- 2023.08.15
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we take a deeper look at BRICS (Brazil, Russia, India, China, and South Africa), and the impact the bloc is likely to have on geopolitics and macroeconomics. The inventor of the term, former Goldman Sachs banker Jim O'Neill, believes the bloc has not achieved anything meaningful in these areas, and doubts it ever will. EPM agrees with this view. The bloc was not created on the back of grand geopolitical vision, shared by the BRICS countries. Rather, the bloc resulted opportunistically, as the member countries realized they had some shared concerns, in particular regarding US dominance over global affairs. Since they all have their own views as to how to deal with those concerns; and since China and India wish to achieve strategic independence, and do not trust each other, which leaves them unwilling to agree to the necessary compromises that are required for real collaboration on the global scene. Efforts to broaden the bloc at present will only entrench its inherent limitations, making them more pronounced, and, we do not expect, therefore, it will drive real change in geopolitics or macroeconomics.
Furthermore, we look at:
The solid, physical demand for crude oil
The possibility that NGLs and biofuels cause a decline in crude oil demand
The unexpected decision by China's central bank to key policy rates for the second time in three months
The Simandou project in the Africa country of Guinea, a massive financial undertaking made possible only because the Chinese think strategic when it comes to energy
Why the inventor of the term BRICS believes the bloc has not achieved anything meaningful in the areas of geopolitics and macro-economics, and doubts it ever will
The view that offshore wind should play a key role in Asia’s energy supply, and what is required to make it so
BP’s investment in Advanced Ionics, a company developing electrolyzer technology for green hydrogen, for use in industrial decarbonization
Spanish energy company Iberdrola’s venture into the voluntary carbon market, by launching Carbon2Nature (C2N)
Tesla’s decision to cut prices – again – in China, but also in the US, which EPM sees as positive indicators for the electrification of transport
General Energy News
Bloomberg says there’s been a rally in the physical market for crude oil. The differentials for spot cargoes from the Middle East have surged in recent days. The explanation is that refining margins are strong – something EPM reported on earlier – while OPEC+ is holding back production and sales. This is leaving refineries to scramble for as much oil as they can, from anywhere they can. In the EPM view this indicates that absence of an adverse shock to demand, or a radical policy shift among OPEC+, oil will remain solid in the $80s or above.
Bloomberg looks at the disconnect between the bullish oil demand outlooks of the IEA and others, which predict continued increases in demand; and the reality that OPEC+ today is keeping millions of barrels of production capacity offline in order to avoid the oil price crashing. The explanation for the disconnect, it says, is that more and more of the liquid energy demanded comes from sources that are not crude oil, primarily Natural Gas Liquids (NGLs) and increasingly biofuels. NGL production increased together with US Shale, and planned increases in gas production around the world are likely to drive continued production growth. And as countries such as India and Indonesia try to blend more bioproduct into the fuel pool, the end result can well be that demand for energy continues to grow, while demand for crude oil actually falls.
Macroeconomics
China's central bank unexpectedly cut key policy rates for the second time in three months on Tuesday, writes Nikkei Asia. The People's Bank of China (PBOC) lowered the rate on 401 billion yuan ($55.25 billion) worth of one-year, medium-term lending facility (MLF) loans to some financial institutions by 15 basis points to 2.50% from 2.65% previously. The move is generally seen as a monetary policy intervention designed to support economic growth in the country.
Geopolitics
Mining giant Rio Tinto and a consortium of Chinese state-owned enterprises have announced that they have concluded key agreements with the government of Guinea, to build a trans-Guinean railway capable of carrying iron ore from the west African nation's inland to the coast, writes Nikkei Asia. Over 600 kilometers of rail together with port facilities will "unlock" the potential of the Simandou mountain range, "the world's largest known undeveloped supply of high-grade, low-impurity iron ore." Rather than cutting through nearby Liberia or Sierra Leone, the plan is to travel through Guinea, which has a tradition of being independent and friendly to China. That means snaking through mountainous Guinean terrain to a deep sea port that will also be built. The plan envisions the construction of 235 bridges, while the longest tunnel will be over 11 km. EPM reports this news under geopolitics as the achievement is very clearly due to geopolitical considerations. The Chinese want access to a wide variety of energy- and mineral-sources, and for that reason have supported the project, which in the past was not able to get funded by Western sources because of the daunting cost of the infrastructure that needs to be developed for it. China imported 69% of its iron ore from Australia in 2022, and another 23% from second place Brazil. To address this dependency, which has geostrategic implications, the Chinese are willing to invest in projects such as Simandou, even if the conventional IRR metric does not justify that investment. The second reason why we report this under geopolitics is that we expect the US to be “less than pleased” with this project, and we foresee significant pressure on Rio Tinto, and the Guinean government, to call it off.
The inventor of the term BRICS, former Goldman Sachs banker Jim O'Neill, believes the bloc has not achieved anything meaningful in the areas of geopolitics and macroeconomics, and doubts it ever will, writes the Financial Times. O’Neill created the phrase in a 2001 research note he wrote as Goldman Sachs’ chief economist. Eight years later, the mentioned countries started to meet formally. For the group to establish a common currency is impossible, he says, as it means the different member states giving up monetary sovereignty, which countries like China and India will never do. There is also a lack of trust between in particular China and India, over historical events, that is holding the bloc back from really collaborating on key issues. Lastly, since none of the member states have been able to convince non-BRICS members to move away from the US dollar toward a BRICS currency, on a meaningful scale, at least, it is also very unlikely the bloc will be able to cause an end to the US dollar hegemony on the global economy – at best it can reduce the role of the US as BRICS members trade more among themselves in their own currencies.
Energy Transition & Technology News
Offshore wind can play a key role in Asia’s energy supply, given the continent’s vast coastlines and massive wind resources, says an opinion piece in Nikkei Asia. But, it says, the regional collaboration that is key to driving down costs and solving supply chain, infrastructure and marine spatial planning issues, is not happening yet. If Asian countries, in response to the new geopolitical reality, were to impose heavy local content requirements for wind projects, this would make matters worse and strongly impact the commercial viability of future offshore wind projects. In the EPM view, what this perspective boils down to, is that Asia should remain open for business with China. If it allies with the US, and under the US security umbrella is then slowly but steadily nudged away from doing business with China, it will close its access to the cutting-edge wind energy technology and manufacturing industry that China has built up over recent years. (China is targeting 100 GW of offshore wind capacity in service by 2025, 200 GW by 2030 and 1,000 GW by 2050.) Without access to this resource, no Asian nation will be able to meet its ambition in a cost-effective manner. And in the world that EPM foresees, where energy security will trump sustainability at least in the developing world, this will mean offshore wind does not take off in the region more broadly.
BP Ventures, the British energy giant's venture capital arm, was among several investors in a $12.5 million Series A financing in U.S.-based Advanced Ionics, a company developing electrolyzer technology for green hydrogen, writes Reuters. Advanced Ionics focuses on “water vapor electrolyzers”, which could address two of the biggest obstacles to expanding green hydrogen production: electricity requirements, and thereby costs. In enables industrial operations to use waste heat in the electrolysis process, thereby lowering the energy that needs to be “imported” for electrolysis, to less than 35 kilowatt hours (kWh) per kilogram of hydrogen compared with more than 50 kWh per kilogram for a typical electrolyser. This would lower the cost of green hydrogen to below $1 per kilogram, and thereby make decarbonization of heat and generation at industrial plants, through a switch from fossil fuels to green hydrogen, economically attractive.
Spanish energy company Iberdrola has ventured into the voluntary carbon market by launching Carbon2Nature (C2N), writes S&P Global. C2N will offer high-quality carbon credits through in-house or collaborative projects that improve biodiversity, nature conservation and restoration. It aims to capture more than 61 million mtCO2e by promoting projects that conserve and restore ecosystems across over 100,000 hectares, including forests, coastal ecosystems and agricultural soils, the company says. And it will focus on countries where Iberdrola is active. 80% of C2N's projects will be based in Latin American countries such as Brazil, Mexico, Colombia, Peru and Chile while countries the remaining 20% will be in the northern hemisphere, such as Spain, the United Kingdom and Portugal.
The Electrification of Transport
Tesla has introduced new standard range Model S and Model X cars in the United States, priced cheaper than the other versions of the S and X models, writes Reuters. The new S and X models were priced at $78,490 and $88,490, respectively. Earlier, the company again cut prices in China for its Model Y long-range and performance versions. Clearly, competition is heating up in the EV segment of transport, which EPM believes is a positive sign. More companies are bringing more models to the market, to fight over market share. While this is “bad” for (some) companies, it is “good” for the overall EV sector. Competition will drive continued improvement in quality, including in battery technology, and thereby significantly drive uptake of EVs over coming years.
Other
A court in the US state of Montana has ruled in favor of young people who alleged the state violated their right to a “clean and healthful environment” by promoting the use of fossil fuels, writes The Washington Post. The case involved 16 young Montanans, ranging in age from 5 to 22, who were represented by the nonprofit law firm Our Children’s Trust. The court determined that a provision in the Montana Environmental Policy Act, which prevents the state of Montana from considering the climate impacts of energy projects, has harmed the state’s environment and thereby the young plaintiffs. The Montana case will face an appeal to the state Supreme Court, Emily Flower, a spokesperson for Montana Attorney General confirmed. She decried the ruling as “absurd” and said Montanans cannot be blamed for changing the climate. “Their same legal theory has been thrown out of federal court and courts in more than a dozen states,” said Flower. “It should have been here as well.”