Energy, Politics, & Money - 2023.09.15
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 OPEC’s childish response to the IEA fossil energy outlook. The IEA said oil, gas and coal demand could well peak before 2030. OPEC presents the IEA forecast as a “wish” or “desire”, while the IEA presented its own forecast as a data-based analysis.
In our view, OPEC is free to disagree with the IEA, but it should then highlight the IEA assumptions it disagrees with, and present the alternative assumptions that it believes are more reasonable. OPEC’s current response is just emotional language, which drives polarization.
For the record, EPM sees the shorter- to medium-term for fossil fuel demand in line with the IEA. Transportation accounts for 60% of oil demand, and most segments of transportation are set experiencing an acceleration of EV penetration. Meanwhile, investment in electricity capacity has for longer been dominated by renewables, which we expect will continue.
We believe it is most likely these trends will continue, which would mean that the dominant share of investment in the global energy system will go into new energies. This, in turn, would lead to a peak in fossil energy demand, as the growth in energy demand will be supplied by new energy solutions.
Furthermore, we look at:
Why the efforts by Saudi Arabia and Russia to keep the oil price high are likely to be self-defeating over the medium- and longer-term
China’s lead in advanced technological research in 80% of critical fields including hypersonics and underwater drones
Confirmation in economic data of the view on the Chinese economy that EPM shared yesterday, which says that outside of real estate, things are actually solid
The risks brewing in China’s insurance sector
The view that US Fed rate policy is more important for the global economy than China’s economic problems
The EU plan to cut its dependency on China for battery and solar panel materials
The Wood Mackenzie assessment that global investment of $2.7 trillion a year is needed to achieve net zero emissions by 2050 and avoid temperatures from rising above 1.5 degrees Celsius this century
How Tesla is quietly driving a revolution in car manufacturing, which leaves it on track to achieving its aim of reducing EV manufacturing costs by 50%
Why the EU investigation into unfair trade practices when it comes to China’s EV sector is hypocritical
The study which found that emissions of methane from oil and gas operations are much higher than reported to the UNFCCC
Another study into traded offsets finding that they are mostly bogus
General Energy News
OPEC has responded to the IEA oil demand outlook EPM reported on yesterday. The IEA said oil, gas and coal demand could well peak before 2030. "Based only on today's policy settings by governments worldwide — even without any new climate policies — demand for each of the three fossil fuels is set to hit a peak in the coming years. This is the first time that a peak in demand is visible for each fuel this decade — earlier than many people anticipated," IEA head Fatih Birol said. According to Reuters, OPEC says such projections are "so dangerous", because they are often accompanied by calls to stop new oil and gas investments. "Such narratives only set the global energy system up to fail spectacularly," OPEC Secretary General Haitham Al Ghais said in the statement. "It would lead to energy chaos on a potentially unprecedented scale, with dire consequences for economies and billions of people across the world."
EPM is left bewildered by what we see as a childish response by OPEC. It presents the IEA forecast as a “wish” or “desire”, while the IEA presented its own forecast as a data-based analysis. OPEC is free to disagree with the IEA, but it should then highlight the IEA assumptions it disagrees with, and present the alternative assumptions that it believes are more reasonable. OPEC’s current response is just emotional language, which drives polarization. For the record, EPM sees the shorter- to medium-term for fossil fuel demand in line with the IEA. Transportation accounts for 60% of oil demand, and most segments of transportation are set experiencing an acceleration of EV penetration. Meanwhile, investment in electricity capacity has for longer been dominated by renewables, which we expect will continue. We believe it is most likely these trends will continue, which would mean that the dominant share of investment in the global energy system will go into new energies. This, in turn, would lead to a peak in fossil energy demand, as the growth in energy demand will be supplied by new energy solutions.
An opinion piece over at Bloomberg that the efforts by Saudi Arabia and Russia to increase oil prices might end up being self-defeating. Firstly, because if in response to the higher prices Beijing by releasing barrels from its reserves, the effect will be to lower import demand and soften prices globally. That will dissipate the impact of Moscow and Riyadh’s drive to force crude higher. Secondly, dollar that Russia and Saudi Arabia add to the price of oil now will lead to a faster drop in long-term demand from their most important market, as well as the nation set to take its crude-consumption baton, India, through incentivizing the switch to electrified transport. This view reminds EPM of an article from 2017, entitled “The Next Oil Price Spike May Cripple The Industry”, which argued essentially the same, meaning that oil exporting companies should not allow oil prices to go too high if they want to protect longer term oil demand.
Macroeconomics
Longer term, the outlook for Chia is bright. China leads advanced technological research in 80% of critical fields including hypersonics and underwater drones, Nikkei Asia writes, namely. Out of 23 technologies analyzed by the Australian Strategic Policy Institute (ASPI), China leads research in 19. The rankings are based on the 10% most cited academic papers among 2.2 million published between 2018 and 2022, with a focus on fields considered key to the trilateral security partnership among the U.S., the U.K. and Australia, or AUKUS. The U.S. leads in the remaining four technologies. The ASPI report says there is a high risk of China dominating in the technology, considering how far it is ahead of its competitors and the concentration of institutions producing high-impact research in the country.
But in the current, the slump in China's property sector worsened in August, writes Reuters, with deepening falls in new home prices, property investment and sales, despite a recent flurry of support measures. New home prices fell at the fastest pace in 10 months in August, down 0.3% month-on-month after a 0.2% decline in July. Property investment fell for the 18th straight month, down 19.1% year-on-year from a 17.8% slump the previous month.
Echoing an analysis EPM shared yesterday, outside of real estate things looked better in China. Industrial output and retail sales grew at a faster-than-expected pace in August, writes Reuters. Industrial output rose 4.5% in August from a year earlier, accelerating from the 3.7% pace seen in July and above expectations for a 3.9% increase. The growth marked the quickest pace since April. Retail sales, a gauge of consumption, also increased at a faster 4.6% pace in August aided by the summer travel season, and was the quickest growth since May. That compared with a 2.5% increase in July, and an expected 3% increase.
Banks and local government debt usually grab the headlines when it comes to risks in China's financial system. But insurance, a sector traditionally associated with caution and prudence, has quietly turned into a slow-burning crisis for regulators, writes Nikkei Asia. China's insurance industry, the world's second-largest in terms of premium income, is beset with challenges. It is struggling to overcome the fallout from three years of strict COVID-19 controls that hit sales and profits. Weak stock and bond markets and low interest rates have hit investment returns, making it difficult for some insurers to pay out on high-yield policies sold when rates were higher. As a result, in 2022, the combined profit of China's 86 life insurance companies slumped 57.3% to 57.2 billion yuan ($7.9 billion), according to data compiled by the Insurance Association of China. Only 38 were profitable, down from 59 the previous year, and 71 companies turned in a worse performance than the previous year. The 10 biggest money-losing life insurers lost a combined 109.7 billion yuan.
For all the worries about the potential global spillovers from China’s economic troubles, it’s actually the US Federal Reserve that’s inflicting pain on much of the world at the moment, writes Bloomberg. The reason: Although financial markets had been pricing in rate cuts for the latter part of 2023, it’s become clear that US interest rates are likely to stay high as the threat of a recession recedes but US inflation continues to show signs of stickiness. Many middle-income and developing nations are now having to delay plans for cutting rates, even if it means curbing growth, because of the risk of triggering destabilizing capital outflows.
Energy Transition & Technology News
Global investment of $2.7 trillion a year is needed to achieve net zero emissions by 2050 and avoid temperatures from rising above 1.5 degrees Celsius this century, Reuters writes based on a report by consultancy Wood Mackenzie. To decarbonise the energy sector investment of $1.9 trillion a year is needed, and this must increase by 150% – or $2.7 trillion a year – to limit global warming to 1.5C. Three-quarters of that investment is needed in the power and infrastructure sectors. "Oil and gas still have a role to play as part of a managed transition. There will be a natural depletion as low and zero carbon options develop but supply still needs to be replenished as we move towards net zero," said Prakash Sharma, vice president at Wood Mackenzie, and lead author of the report.
Climate Politics
The EU has voted in a plan to secure more of the critical materials needed to make solar panels, electric car batteries and other key elements of its green transition, writes The Guardian. In an attempt to reduce its dependency on China, it plans to ensure that by 2030 it does not rely on a single country for more than 65% of its supply of any strategic raw material. To achieve this, the EU aims to build the capacity by 2030 to extract materials meeting at least 10% of its demand and process materials meeting 50% of its demand, with a clause allowing for up to 20% of new processing capacity to come from partnerships with emerging markets. It should also boost recycling capacity to collect, sort and process 45% of the strategic materials in its waste for recycling.
The Electrification of Transport
Tesla has combined a series of innovations to make a technological breakthrough that could transform the way it makes electric vehicles and help achieve its aim of halving production costs, writes Reuters. The company pioneered the use of huge presses with 6,000 to 9,000 tons of clamping pressure to mold the front and rear structures of its Model Y in a "gigacasting" process that slashed production costs and left rivals scrambling to catch up. In a bid to extend its lead, Tesla is closing in on an innovation that would allow it to die cast nearly all the complex underbody of an EV in one piece, rather than about 400 parts in a conventional car. The casting breakthrough Tesla has made centres on the how the giant molds for such a large part are designed and tested for mass production, and how casts can incorporate hollow subframes with internal ribs to cut weight and boost crashworthiness. In both cases the innovations, developed by design and casting specialists in Britain, Germany, Japan and the United States, involve 3D printing and industrial sand. If it manages to gigacast most of the underbody of an EV, it would further disrupt the way cars are designed and manufactured.
According to Reuters, the EU investigation into unfair trade practices when it comes to China’s EV sector is hypocritical. Beijing does indeed provide its manufacturing base with formidable help - including tax breaks, funds for plant construction, low interest loans, capped energy costs and subsidies to help consumers buy their products, it says. But the European Union itself offers an array of benefits for EV producers and consumers, including tax breaks for manufacturers, thousands of euros of subsidies per car for buyers and tax credits for households and businesses that install EV chargers.
Other
Observed methane releases from global oil and gas operations are 30% higher than what countries estimate in reports to the UN, according to a new study that analyzed satellite observations of the potent greenhouse gas, writes Bloomberg. The world’s four largest oil and gas emitters, the US, Russia, Venezuela and Turkmenistan, account for most of the overall discrepancy. The study identified significant opportunities to reduce methane emissions in Venezuela, Turkmenistan, Uzbekistan, Angola, Iraq, Ukraine, Nigeria and Mexico, all of which have methane intensities between 5% and 25% for their oil and gas industries. Lowering those intensities to the global average of 2.4% would reduce emissions from the sector globally by 18%.
A popular category of carbon offsets held by a number of major publicly traded companies is significantly more prone to green washing than previously feared, according to a new investigation, writes Bloomberg. The study looked at so-called REDD+ credits, which represent roughly a quarter of carbon offsets issued globally. “Many of the researchers have been studying carbon-offset quality for many years, and even we were surprised,” Barbara Haya, director at the Berkeley Carbon Trading Project and the lead researcher behind the report, said in an interview. “We found problems under every stone we turned.”