Energy, Politics, & Money - 2023.09.11
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 what we at EPM believe is a major development in the world geopolitics and one that is likely to have transformative implications for the global economy.
On the sidelines of the G20, under the leadership of the U.S., a memorandum of understanding was agreed between the European Union, India, Saudi Arabia, and the United Arab Emirates, for an infrastructure project to link Middle Eastern countries by railway and connect them to India by port.
The vision is that will enable increased trade flows between the EU, the Middle East and India. EPM notes that this is of course designed to facilitate a shift in manufacturing from China to India.
This is indicated among other ways by the fact that it was Jon Finer, the U.S. deputy national security adviser, who spoke to reporters, rather than a person from commerce or trade. "Linking these key regions, we think, is a huge opportunity," said Finer. The agreement is all about “friend-shoring the global supply chain”, enabling companies to relocate their manufacturing away from China to India. Which is why we at EPM believe the change could well be transformative.
Furthermore, we look at:
9-month high oil prices, which are most likely to remain strong during the remainder of 2023
The view that China should turn to deregulation rather than stimulus, to deal with its current weakness
The view of the head of the U.S. -China Economic and Security Review Commission, which advises the U.S. Congress on national security matters, on where the U.S. – China tech war is leading the global economy
The entry of the African Union into the G20; and the G20’s softened language on the Ukraine War, which in the EPM view indicates how the relative power dynamic between the Global North and South has developed since then
The major U.S. diplomatic achievement at the G20, an infrastructure project to link the Middle East with India, which can be seen as the U.S. ’s answer to China’s Belt and Road, and increases the chances of these critical regions remaining firmly in the camp of “U.S. allies”
U.S. president Biden’s visit to Vietnam, which is in a highly strategic position for as far as the U.S. – China competition is concerned
Zalmay Khalilzad’s view on how the U.S. should respond to the new map of China that Beijing published last week
How the inflationary pressures in the offshore wind energy supply chain are bringing offshore wind to a halt in the U.S. and the UK
Why the Middle East is lagging behind when it comes to the build out of renewable energy capacity
Shell’s decision to put its residential battery storage and virtual power plant (VPP) company Sonnen up for sale
Germany’s failed attempt to convince the other EU states to back e-fuels as a decarbonization solution for passenger cars
The trend towards electrification of the fleet of 2-wheelers in Southeast Asia
General Energy News
Oil prices closed at a 9-month high last week, driven by worries about tight oil supplies after Saudi Arabia and Russia extended supply cuts. Brent futures settled at $90. 65 a barrel, while WTI settled at $87. 51, writes Reuters. For the week, both benchmarks were up about 2%, following gains last week of about 5% for Brent and about 7% for WTI.
Fortune looked at the remainder of 2023, and what the oil price could do if Saudi Arabia and Russia were to maintain their cuts. As to alternative sources of supply, Iraq could add 400,000 to 500,000 barrels a day of production if it solves a three-way legal dispute with its semi-autonomous Kurdish region and the government of Turkey that shut down a key export pipeline. Yet after six months of talks a resolution is still proving elusive. Iran has been boosting production amid weaker enforcement of U.S. sanctions, but its exports may have reached their peak for the year as production is already nearing pre-sanctions production levels. On the demand side, developments in China, the world’s largest oil importer, will be critical. But, it notes, despite the headlines about China’s economic troubles, demand for liquid fuels in the country is strong.
The shorter-term outlook for oil is strong, therefore. With presidential elections in the U.S. coming this is creating a headache for the incumbent, says the Financial Times. President Joe Biden as he puts his record on the U.S. economy — and thwarting inflation — at the centre of his re-election bid, says FT. Rising gasoline prices have the power to reverse the sense that the situation is improving and inflation is coming down, however. The pain is already plain at U.S. petrol stations, where prices have climbed by almost a quarter this year to $3. 80 a gallon. That remains below the record high of more than $5 reached last summer — but still 60 per cent above their level when Biden entered office in January 2021.
Macroeconomics
An opinion piece in the South China Morning Post argues that the right response to China’s current economic weakness would be deregulation, rather than further stimulus. China has very limited scope for further economic stimulus, it says, having offered that for over four decades. The result is that while central government debt remains modest, regional governments are buried in debt, with some regional governments already on the cusp of default. A further lowering of interest rates, to spur on private investment and consumption, would have as a negative consequence further weakening of the yuan exchange rate. Besides, it, as well as other monetary policy options, are unlikely to have much impact due to the weakness of demand in the country. On the regulation side, however, there is much the Chinese government could still do. For example, in the big cities there are still restrictions on property prices, “hukou controls” over household registration and therefore residence, and homebuyer eligibility requirements. In the broader economy, onerous license requirements and time-consuming project approvals could be cut down and tax burdens reduced.
On the trend toward regionalization of the global economy, Fortune shares the view of Jacob Helberg, a senior policy advisor to data analysis firm Palantir, and head of the U.S.-China Economic and Security Review Commission which advises the U.S. Congress on national security matters. “What we’re seeing unfolding in real time is nothing short of a tech war between the U.S. and China,” Helberg says. He argues that as China and the U.S. continue to develop AI for military applications, there will be a split “into a Chinese-led technology world and an American-led technology world.” He also says, “the U.S. and China are in a race for global leadership in artificial intelligence,” and after falling behind for years, China is catching up. Helberg argued that the U.S. military still leads the People’s Liberation Army (PLA) in aerial applications of AI such as drones, but the PLA is “highly competitive” in computer vision and underwater autonomous drones. “The leadership in Washington and Beijing both understand that AI is the single most consequential, breakthrough, paradigm-shifting technology in military affairs in 80 years,” he said. “And China views AI as essential to leapfrogging U.S. military capabilities, particularly in the Indo-Pacific. ”
Geopolitics
During the G20 meeting in New Delhi, India, it was agreed to admit the African Union as a new member, writes AP News. U.S. President Joe Biden called last year for the AU’s permanent membership in the G20. In EPM’s view, this move is a response to a key complaint from the Global South, which is being leveraged by China and Russia in their international diplomacy, that the developing world has not been given a proper place in the U.S. built “international rules based order”.
The G20 leaders also reached a consensus on a joint declaration regarding the Ukraine War, writes Nikkei Asia. Indian Prime Minister Narendra Modi announced the breakthrough on Saturday, the first day of the two-day meeting. The result is a similar but softer document than the declaration agreed at the previous G20 summit in Bali last November. Missing, for example, is the wording that "most members strongly condemned the war in Ukraine." It also skips Bali's specific description of the U. N. resolution that "deplores in the strongest terms the aggression by the Russian Federation against Ukraine." Addressing the argument among some members that the G20 should be primarily a forum for economic cooperation, the statement says "that while the G20 is not the platform to resolve geopolitical and security issues, we acknowledge that these issues can have significant consequences for the global economy." EPM notes with interest, that this development indicates, firstly, the gap between the Global North and the Global South on the issue of Ukraine continues to exist; and secondly, that a year after Bali, the Global North led by the U.S. is forced to compromise more, not less, indicating how the relative power dynamic has developed since then.
On the sidelines of the G20 the U.S. appears to have completed a major diplomatic achievement, which will have not only geopolitical but also significant economic implications. Nikkei Asia reports that under the leadership of the U.S. , a memorandum of understanding was agreed between the European Union, India, Saudi Arabia, and the United Arab Emirates, for an infrastructure project to link Middle East countries by railway and connect them to India by port. The vision is that will enable increased trade flows between the EU, the Middle East and India. EPM notes that this is of course designed to facilitate a shift in manufacturing from China to India. This is indicated among other ways by the fact that it was Jon Finer, the U.S. deputy national security adviser, who spoke to reporters, rather than a person from commerce or trade. "Linking these key regions, we think, is a huge opportunity," said Finer. The agreement is all about “friend-shoring the global supply chain”, enabling companies to relocate their manufacturing away from China to India. Which is why we at EPM believe the change could well be transformative.
After attending the G-20, U.S. president Biden travelled to Vietnam, writes Nikkei Asia. The agenda includes talks on climate, trade (chips and other technology), the South China Sea and human rights, and is likely to trigger a response from next-door China. Vietnam is in a highly strategic position for as far as the U.S. – China competition is concerned, and Vietnam is interested in using this to its advantage. The country can help the U.S. counterbalance China, both as a factory alternative that dominates global electronics and apparel, and as a challenger to Beijing's claims in the South China Sea. In return, it wants U.S. concessions like tariff cuts and recognition as a market economy, which comes with trade perks.
Writing for The National Interest, Zalmay Khalilzad, former U.S. Ambassador to the United Nations and U.S. ambassador to Afghanistan and Iraq, proposes a very hawkish U.S. response to the new map China released last week. The map “represents an escalation by Beijing to further extend its unilateral redrawing of international boundaries”, he says, and he calls it “an extraordinarily provocative move” that “violates the International Law of the Sea”. “The United States must not stand idly by”, Khalizad says, and he recommends the following key actions. First, deter Chinese escalation and aggression, through strengthening the military capabilities of the U.S. and its allies in the region. Second, unite and lead the nations that are angry about China’s new map.
Energy Transition & Technology News
The UK’s latest offshore wind auction received no takers, writes Reuters. Wind players sat out the latest auction because turbine and other costs have recently spiked, meaning they wouldn’t be able to make an adequate return selling electricity despite a government subsidy worth 44 pounds per megawatt-hour in 2012 prices. EPM notes that something similar happened in the U.S. , where projects were recently cancelled as the inflationary pressures in the offshore wind supply chain is leaving them uneconomic based on earlier agreed electricity pricing schemes.
Bloomberg looks at why the Middle East is lagging behind when it comes to the build out of renewable energy capacity. The region has started 6.9 gigawatts of solar and wind projects since May 2022, and another 9 gigawatt is likely to be completed by the end of next year. But, South America, a region with a similar population size and gross domestic product, has brought online at least four times as much capacity. The reason is simple and straightforward. The Middle East is home to some of the world’s biggest and lowest-cost oil and gas producers, which keeps fossil fuel based electricity generation economically attractive.
Shell has put its residential battery storage and virtual power plant (VPP) company Sonnen up for sale, writes Energy Storage News. Sonnen provides residential battery storage solutions and aggregates them into VPPs across Europe and the U.S. Shell reportedly paid around €500 million for Sonnen back in 2019. The company is now valued at between €1.35-1.8 billion (U.S. $1.45-1.93 billion). In EPM’s view, as you know, Shell’s new strategic direction, to return the company to being a pure oil and gas company again, with a focus on Upstream and in Downstream trading and fuels retail, is shortsighted. It is about shorter-term optimization of financial results, without much concern for the longevity of the company. We consider that a shame, especially for Shell, since it pioneered research into what is required for a company to prosper through changing times. All the lessons from this research it is now throwing out of the door.
Climate Politics
Germany is not finding much support for its plan to make e-fuels part of the EU’s decarbonization pathway, writes Politico. Germany’s Transport Minister Volker Wissing tried to persuade countries to sign up to a statement about backing synthetic e-fuels as an option for cutting greenhouse gas emissions from passenger cars, meant to be announced at the Munich Auto Show, but failed. In the end, only three countries backed Wissing. The Czech Republic and Japan, both big carmakers, along with Morocco, which is hopeful of commercializing its vast potential to use solar and wind power to generate the green hydrogen needed for the production of e-fuels.
The Electrification of Transport
Gojek, a top ride-hailing service operator in Indonesia, is to replace all two-wheelers with electric motorbikes by 2030, writes Nikkei Asia. The company is reported to have more than 2 million registered drivers of motorbikes and automobiles. Gojek is expanding the procurement of e-bikes. It founded the Electrum joint venture to produce electric motorcycles, and signed a strategic tie-up agreement with Gogoro. With construction on a plant in the province of West Java having started in late June, Electrum is expected to set an initial production target of 250,000 units per year. The new plant "will increase the availability of EVs throughout the country and encourage EV adoption among Indonesians," Electrum President Pandu Sjahrir said. The use of electric motorbikes is gathering steam in Indonesia, Southeast Asia's biggest two-wheeler market with annual sales of more than 5 million units, and beyond. Leading Singapore-based ride-hailing company Grab will also promote the introduction of e-bikes in various countries in a bid to achieve net zero carbon dioxide emissions by 2040. In Malaysia, Grab will encourage its roughly 80,000 drivers to use electric motorcycles from Chinese brand Blue Shark, produced by a subsidiary of auto parts producer EP Manufacturing with whom it has teamed up. In Thailand, Grab plans to raise the ratio of e-bikes and electric vehicles to 10% of the total by 2026. Lazada, a major e-commerce company based in Singapore, is expected to introduce 15,000 electric motorcycles for home delivery of merchandize through a tie-up with a startup offering the two-wheelers in Indonesia.