Energy, Politics, & Money - 2023.08.29
Independent, objective, & neutral analysis of global developments curated from sources covering global developments in energy, geopolitics, & investment.
In this roundup, we take a closer look at the ExxonMobil Energy Outlook to 2050, which the company positions as a realistic “projection” rather than other scenarios that “work backward from a hypothetical outcome to identify the factors needed to achieve that outcome”. It says that because the global population is likely to grow by 2 billion people by then, global energy demand will increase by 15% from today. It also says that oil and natural gas will continue to provide slightly over 50% of that energy – 54% to be exact, compared to 55% today. As a result, emissions will decrease by just 25% from current levels, meaning a far cry from Net Zero. Underlying the Outlook is the assumption that oil demand will remain above 85 million barrels per day, as any decline in demand from the electrification of passenger cars will be offset by higher demand from shipping, aviation and heavy duty transport. EPM sees this element of the outlook as unrealistically optimistic (from an oil perspective). For more analysis, please see below.
Furthermore, we look at:
China’s new oil product export quotas, which are designed to enable oil companies to send their surplus barrels overseas
The comments by the Indian Minister of Petroleum and Natural Gas on his country’s Russian oil imports and the role of the U.S. dollar, which in the EPM view pour cold water on the hyped-up view that BRICS are working to upend the global oil markets against U.S. interests
The bearish view of the global economy, characterized by record levels of government debt and geopolitical tensions splitting the global trading system, that was debated at the Jackson Hole meeting of central bankers
The view of general Yoshihide Yoshida, head of Japan’s armed forces, as to why Japan needs to increase expenditure on defense, including on U.S.nuclear weapons
Saudi Arabia’s interest in nuclear energy, and how it is using this to pressure the U.S. into a more favorable deal for the Kingdom when it comes to the U.S. ambition of “normalization” with Israel
How China is racing ahead of everyone else when it comes to offshore wind installations
There “striking differences” between the current positions of Al Gore and John Kerry on the fossil fuel industry, which highlight some increasingly important divisions in the wider climate debate
The “extremism” of the current climate politics debate, and the expectation that this will eventually lead to “blowback” from the general population
The price advantage for lease of an electric vehicle (EV) in the United States, which is now the cheapest option for car buyers in all U.S. states
The inconvenient truth regarding Europe’s successful management of its energy crisis, which is that the price it is paying for this success is a deep recession in the manufacturing sector, and a long-term loss of economic growth
General Energy News
China has issued new oil product export quotas to enable oil companies to send their surplus barrels overseas, writes S&P Global. Market sources said oil companies are set to export about 3.5 million mt of clean oil products in September, comprising about 800,000 mt of gasoline, 1.1 million mt of gasoil and 1.6 million mt of jet fuel. The volume is likely to be 10% higher than in August. A Hong Kong-based analyst said
It makes sense if the government relaxes the restriction on oil product exports to support industrial activities, thus boosting the weaker-than-expected economy. This would also help to sustain crude imports.
India isn’t overly dependent on anyone for oil — not even Russia, India’s Minister of Petroleum and Natural Gas told CNBC. Since Russia’s invasion of Ukraine in February last year, India’s refiners have been snapping up discounted Russian oil. Moscow has since leapfrogged to become India’s leading source of crude oil, accounting for about 40% of India’s crude imports. “We’re diversified. We used to buy from 27 sources — today we are buying from 39 sources,” he said. He also told CNBC that the idea of “de-dollarization” — or moving away from the U.S.dollar to settle trades in other currencies — is still far away. “I would like to be able to transact everything in rupees. But I am a realist,” he said. The U.S.dollar will remain the currency of choice for transactions in international oil markets, he also told CNBC. “I don’t know what kind of change [the dollar needs to] be affected but I don’t see it ... It’s not so easy.” In the EPM view, the comments by the Indian minister pour cold water on the hyped-up view that BRICS are working to upend the global oil markets against U.S. interests.
ExxonMobil has published its Energy Outlook to 2050. It says that because the global population is likely to grow by 2 billion people by then, global energy demand will increase by 15% from today. It also says that oil and natural gas will continue to provide slightly over 50% of that energy – 54% to be exact, compared to 55% today. As a result, emissions will decrease by just 25% from current levels, meaning a far cry from Net Zero.
The EPM perspective on the outlook is limited, since ExxonMobil did not provide many details regarding its assumptions. It did not break down oil from gas. And it did not provide any information regarding its assumptions around the electrification of transportation – and since transportation accounts for some 60% of current oil demand, this is critical. ExxonMobil is assuming a decline in coal use for power generation, which we then assume drives an increase in gas usage in the company’s outlook. This we see as a possibility, although another real possibility in our view is that renewables growth further accelerates from current levels, limited the growth of natural gas. In fact, that would be our base case. But assuming ExxonMobil sees growth in gas usage by 2050, then this means its outlook also assumes a decline in oil usage. This we see as unavoidable due to the electrification of transportation. Here we expect ExxonMobil to be underestimating how things are likely to play out. A common theme among oil and gas analysts is that (a) the developing world can not afford to switch to electric cars and will thus continue to use the internal combustion engine, (b) there is not enough lithium to electrify the global vehicle fleet, and (c) heavy duty road transport can not be powered by batteries.
At EPM we think all these three assumptions are incorrect. We firmly believe battery technology innovation will continue, faster than expected (at least among oil and gas analysts). This will drive the cost of EVs down to the point that all car companies switch to EV platforms essentially 100%. They will then develop EVs specifically for the developing world. The internal combustion engine becomes a niche solution for very specific and limited markets. In sum, therefore, we at EPM suspect is most likely overestimating the demand outlook for oil and gas, but we say that with a word of caution until we are enabled to review the ExxonMobil assumptions.
Bloomberg provides more details regarding the ExxonMobil outlook, which the company positions as a realistic “projection” rather than other scenarios that “work backward from a hypothetical outcome to identify the factors needed to achieve that outcome”. Bloomberg says that ExxonMobil assumes significant growth in the demand for oil-derivates coming from shipping, aviation and heavy duty transport. As a result, ExxonMobil says, even if every new car sold in 2035 was electric, oil consumption in 2050 would still be 85 million barrels per day — 17% less than today — and about the same as 2010 levels. EPM does not see how these maths could work. A classic analysis of crude oil demand highlighted that passenger cars represent about 25 mbd of oil demand; light, medium and heavy duty commercial vehicles ~17-19 mbd; aviation ~6-8 mbd; and marine ~5=7 mbd. You remove the demand from passenger cars and light and medium duty commercial vehicles, then oil demand from shipping, aviation and heavy duty commercial vehicles must essentially triple by 2050 to get to ExxonMobil’s 85 million barrels of total crude oil demand by 2050 – assuming no decline in oil demand from industry (~15 million barrels per day currently) and petrochemicals (~12 million barrels per day currently). EPM respectively says, we don’t see that happening, considering the strong ambitions in all mentioned sectors to decarbonize, and the already ongoing electrification of light and medium duty transport.
Macroeconomics
The western Chinese city of Xi'an is setting up a public-private fund worth up to 5 billion yuan ($686 million) aimed at supporting cash-strapped government-backed financing vehicles, in order to support stabilization of the property sector, writes Nikkei Asia. The public-private fund will lend money for up to six months to local government financing vehicles (LGFVs) that are experiencing difficulty borrowing money from banks or the capital market, and could possibly become a model for other local governments across the country.
Record levels of government debt, geopolitical tensions that threaten to split the global trading system, and the likely persistence of weak productivity gains may saddle the world with a slow-growth future that stunts development in some countries even before it starts. That sobering view of a post-pandemic global economy, crafted by the Kansas City Federal Reserve, was debated at the Jackson Hole meeting of central bankers the past weekend, writes Reuters.
Geopolitics
In an interview with Nikkei Asia, general Yoshihide Yoshida, head of Japan’s armed forces, laid out the narrative that will be used to justify increased expenditure on defense. Japan's Self-Defense Forces currently “cannot maintain the country's security in the face of evolving regional and global challenges”, he says. There are two things Japan must now do, he says. “First, we must fundamentally strengthen our defensive capabilities so that we are not underestimated. Second, we need to do what we can to sustain extended deterrence, including through strategies involving U.S.nuclear weapons.”
In the EPM view, all that is fair if you believe China represents a military challenge to Japan. If you don’t believe this, for example if you believe represents just an economic and diplomatic challenger of the status quo (including the U.S. designed “international rules based order”), then you see this narrative as an excuse to justify a military buildup designed to forcefully limit China’s ability to grow. Most important, however, is that however you see things, the practical reality is that the U.S. and its allies in Asia are building up a military arsenal targeting China. An arsenal that includes, as the Japanese general says, nuclear weapons. In the EPM view, this is one of the root causes for the weapons race that is developing in Asia, which greatly increases the chances of war in the region.
Energy Transition & Technology News
Nuclear energy is where the energy transition and geopolitics collide in Saudi Arabia. The country is considering bids to build a nuclear power station from countries including China, France, South Korea and Russia, as part of an effort to pressure the U.S. to give it more concessions in a potential deal to normalise relations with Israel, writes the Financial Times. One person spoken to by the FT said Saudi Arabia would make its decision based on the best offer – which in the view of EPM is complete nonsense, as energy and especially nuclear energy is way to political for that to ever be decided just on financial metrics. Another said that while Riyadh would prefer the U.S., which is seen to have better technology and is already a close Saudi partner, the U.S. demanded restrictions on uranium enrichment goes against Saudi wishes. South Korea’s Kepco was chosen to build a nuclear plant in the United Arab Emirates, its first in the Middle East, which is now operational, but can only to accept terms that align with the U.S. wishes. France’s EDF is more flexible and said the company’s “[bid] proposal addresses all expectations from Saudi stakeholders”.
Europe has lost its position as the world’s largest offshore wind market to the Asia-Pacific region led by China, writes the Financial Times. Europe accounted for about 47 per cent of the 64.3GW of total global offshore wind capacity in 2022, while the Asia-Pacific region surpassed it with almost 53 per cent, according to data from the Global Wind Energy Council. China alone made up almost 49 per cent of the global total. Europe is unlikely to recapture its position as the largest offshore wind market in the next 10 years. Europe will add a total of 34.9GW in offshore wind capacity from 2023 to 2027, down from the 40.8GW projected year. The Apac region is expected to add 76.1GW in the same period, driven by China, which will account for 84 per cent of the increase.
Climate Politics
There are “striking differences” between the current positions of Al Gore and John Kerry on the fossil fuel industry, which highlight some increasingly important divisions in the wider climate debate, writes the Financial Times. Some of Gore’s most searing rhetoric is reserved for the United Arab Emirates, host of this year’s COP28 climate conference, and for Sultan al-Jaber, serving concurrently as COP28 president and chief executive of the Abu Dhabi National Oil Company. “He has a blatant conflict of interest,” Gore thundered. “I think it’s time to say, wait a minute, do you take us for fools?” Kerry, in contrast, stressed the U.S.’s “very close relationship” with the UAE, which he has previously defended against “unfair” criticism given its “enormous steps, historically, to be on the forefront of the transition”.
A specific looming flashpoint at COP28 is around carbon capture technology, which the UAE — as well as Saudi Arabia, and private-sector companies such as ExxonMobil — have been strongly promoting. To Gore, this is a cynical attempt to deflect attention away from the need to reduce fossil fuel usage altogether and rapidly scale up alternative energy sources. “It’s useful to give them an excuse for not ever stopping oil,” Gore said, adding that the technology was unproven and far from ready for large-scale commercial deployment. While Kerry said there was “a risk that it won’t be able to” achieve the impact its backers claim, he was far more positive about investment in carbon capture, which he stressed was already in commercial use as part of the oil extraction process by U.S. drillers. Gore also reserved a fair slug of vitriol for those private-sector energy giants, slamming Shell and BP for watering down their clean energy commitments amid rising oil prices. “The industry as a whole has not been acting in good faith,” he said. Kerry sounded a less hostile note, citing a recent conversation with BP chief executive Bernard Looney, who assured him that the company had not abandoned its climate targets, but merely “changed the pace” at which it would pursue them.
Absolutism is a better description for climate politics these days, says Mike Lynch writing for Forbes. Problems have been replaced by crises, difficulties by catastrophes, challenges by existential threats. This type of political extremism is unfortunately mirrored in policy extremism. Climate change policies are often absolutist, and primarily because those advocating them are ignorant, willfully or not. The absolutist approach to energy policy and climate change reflects primarily a reliance on cliches and superficial arguments rather than comprehensive cost-benefit analysis and coherent policymaking, he says. And given that so many of the proposed solutions are very expensive, the social impact of promoting supposedly clean energy sources regardless of their cost on the pretense of eliminating rather than reducing emissions disguises this. As this becomes understood by the public, expect some serious political blowback against the more extreme energy transition policies, Lynch says.
The Electrification of Transport
Leasing an electric vehicle (EV) is now the cheapest option for new car buyers across the United States – thousands of dollars cheaper per year than buying or leasing a gasoline-powered vehicle, writes Forbes. This new economic dynamic is being driven by several factors, it says. Falling EV lease prices, new federal tax incentives from the Inflation Reduction Act (IRA), lower operating and maintenance costs of EVs compared to gas-powered vehicles, and rising interest rates. EVs are already cost-competitive with gas-powered vehicles, even without the federal incentive, but the IRA’s EV tax credit makes monthly lease prices 12% cheaper on average when dealers pass it along to lessees – making almost every EV model cheaper to lease than gas-powered vehicles.
The Global Energy Crisis
Javier Blas of Bloomberg draws attention to one of the “inconvenient truths” about Europe’s success in managing its energy crisis. “Europe is defeating its energy crisis thanks to the impact that said crisis has had on its industrial heartland”, he says. “Across the continent, many energy-intensive companies have either closed or reduced production after not being able to cope with higher energy prices. The fertilizer, chemical, metallurgic, glass, paper and ceramic industries are particularly affected. All those shuttered factories don’t need gas or electricity now.” In Germany, activity among energy-intensive companies plunged in June by nearly 18% versus late 2020, according to official data. The picture is similar across the rest of the continent. With industrial consumption low and LNG supply so far plentiful, Europe has been able to inject a record amount of gas into underground storage over the spring and summer — despite most countries in the region no longer having access to Russian pipeline gas supply. Yet, European gas prices are running at about €35 ($38) per megawatt hour, compared with the 2010-2020 average of just over €20. Wholesale electricity prices are running above €140 per megawatt hour, more than triple the 2010-2020 average of €38.5. The supply-and-demand gas balance in Europe remains precarious. Only extremely weak industrial demand balances the system. Plentiful inventories help, but even with those, Europe wouldn’t make it through the winter if all the industrial gas demand returned to pre-crisis levels. As such, the price of avoiding the energy crisis is a deep recession in the manufacturing sector, and a long-term loss of economic growth.