Energy, Politics, & Money - 2023.09.18
Independent, objective, & neutral analysis of global developments curated from sources covering global developments in energy, geopolitics, & investment.
In this roundup, we look at:
The continued support the crude oil price is receiving from the Saudi and Russian production cuts; and how this is affecting the global diesel markets
Why a majority of economists polled by the Financial Times believe the US Fed is not yet done hiking interest rates, and why they believe the rates will remain higher for longer
The debate among elite circles in the US about geo-strategy that, depending on the 2024 US presidential election result, could affect the future trajectory of US international policies
Italy's Eni and South Korea's LG Chem linking up to develop a bio-refinery in South Korea
The growing pressures in Europe to push the pause button on decarbonization and energy transition policies, and why the EU Commission president effectively indicated the EU is willing to adjust the course of the EU Green Deal
Why the announcements by the EU last week, regarding Chinese EVs and the supply chain for critical minerals, are effectively an acknowledgement that the bloc’s political and economic leaders have been sleeping at the wheel
General Energy News
Crude oil continued its bull run last week, driven by the Saudi and Russian production cuts. Today, Brent opened in Singapore above $94 a barrel, writes Bloomberg.
Bloomberg writes that secondary effect of the production cuts is a significant shortage in diesel production. It notes, that the crude grades cut by Saudi and Russia are particularly well suited for making diesel. Alternatives, such as US crude grades, tend to be lighter and produce less of the so-called “middle distillates” diesel and jet fuel. As a result, US diesel prices are now above $140 a barrel. Considering diesel’s important role in transportation, this adds more fuel to inflationary pressures the Fed is trying to reduce through higher interest rates.
Macroeconomics
The US Federal Reserve will defy investors’ expectations and raise interest rates by at least another quarter-point, according to a majority of leading academic economists polled by the Financial Times. This is in sharp contrast to the mood in financial markets, where traders in federal funds futures believe the US central bank’s policy settings are restrictive enough to get inflation under control and so it can keep rates on hold well into 2024. In short, the economists’ view is that the economy has not slowed down sufficiently to halt the rate hikes now, while the Saudi – Russia crude oil production cuts are leaving the US economy exposed to a new wave of inflationary pressure coming from energy. Once rates peak, the economists surveyed were overwhelmingly of the view that the Fed would keep them there for quite some time. About 60 per cent of those polled thought the first cut would come in the third quarter of next year or later.
Geopolitics
Over at the Brookings Institute, Michael O’Hanlon - a staunch supporter of the current US strategy in Ukraine - says that in light of the results of Ukraine’s counter-offensive, time has come for the US to rethink its strategy in the conflict:
There are huge risks and costs associated with an ongoing war — not just for Ukrainians, not just for Western taxpayers, but for the whole world, including those affected acutely by grain and energy prices [while] Russia could also rearm and escalate militarily.
An alternative could combine security assurances for Ukraine, coupled with an armistice, and the deployment of independent human rights monitors to the areas of Ukraine now controlled by Russia.
Meanwhile, the National Interest too argues the US current strategy is not correct. The US insistence that Russia is to be defeated in Ukraine before any negotiations between the warring parties are to be launched, while at the same time building a China focused, armed-to-the-teeth military alliance in Asia-Pacific in support of an economic blockade on the country, is causing exactly what the US should be trying to avoid, it says. A Chinese-Russian alliance. But, it argues, there are still opportunities to drive a wedge between Russia and China, just as when Richard Nixon exploited the Sino-Soviet split to establish relations with Mao during the Cold War. Diplomacy is key, it argues, rather than Washington’s current military focused policies. It concludes:
If Washington elects to mount a myopic contest for influence in Asia but forgoes creative diplomatic engagement with China, it won’t just miss an opportunity to split China from Russia once again. It will instead create incentives for these two great powers to join forces, fueling the outcome it fears most.
America doesn’t have the factories or skilled labor to replace Chinese imports that support defense contractors and basic infrastructure, leaving the US economy vulnerable to harm in the event of an all-out trade war with China, corporate and government officials told Asia Times. That’s why Biden administration officials are unlikely to heed calls from China hawks to completely cut off China’s semiconductor sector from US technology, it says. The US can’t stop China from making high-end chips like the new Kirin 9000 processor unless it shuts down all semiconductor fabrication in China. That would entail massive disruption not only of the semiconductor industry but of dozens of industries that depend on it, with grave economic consequences. American vulnerability is evident in the form of thousands of critical components used in critical infrastructure and the US defense industry. Substituting domestic production for these items would entail long lead times and exorbitant costs, industrial officials say. In the event of a full-scale trade war, a Chinese ban on critical components could cripple basic US infrastructure. US defense contractors also depend heavily on China. Raytheon CEO Greg Hayes said his company had “several thousand suppliers in China and decoupling is impossible. We can de-risk but not decouple,” adding that he believed this to be the case “for everybody” in US manufacturing.
EPM shares these perspectives because of the upcoming presidential elections in the US. When thinking about scenarios for the future, it is not necessary to assume current US geostrategy in all scenarios. The articles highlight that a debate among elite circles in the US is taking place about geostrategy. Depending on the election result, this could affect the future trajectory of US international policies.
Energy Transition & Technology News
Italy's Eni and South Korea's LG Chem have linked up to develop a biorefinery in South Korea, writes S&P Global. This potential biorefinery is expected to process approximately 400,000 mt of bio feedstocks annually using Eni's signature Ecofining process. The planned biorefinery aims to address the growing demand for such sustainable fuels and low-carbon plastics, transforming raw materials of biological origin into biofuel. The plant will be flexible to produce multiple biofuels such as sustainable aviation fuel, hydrotreated vegetable oil and bio-naphtha. Among sustainable feedstocks, the biorefinery will mainly work on waste and residues from the processing of vegetable oils, used cooking oil and vegetable oils from drought-resistant crops in degraded, semi-arid or abandoned soils not in competition with the food chain.
Climate Politics
California Governor Gavin Newsom says he will sign legislation that will require large companies to disclose their carbon footprints, writes Reuters. The bill will require companies earning more than $1 billion a year and operating in the state to measure categories of emissions including Scope 3.
Politico writes that German Finance Minister Christian Lindner has warned politicians in Brussels against seeking to enact stricter clean energy rules for buildings. Such plans could spark a dangerous voter backlash and fuel the rise of the far right, Lindner says. He urged European Commission President Ursula von der Leyen to "pause" new EU legislation aimed at curtailing greenhouse gas emissions during a time of economic stagnation wrought in part by high energy costs.
According to Politico, EU Commission president Ursula Von Der Leyen during her State of the Union address last week indicated she is conscious of the tensions and willing to make adjustments to the European Green Deal. She said
The European Green Deal was born out of this necessity to protect our planet. But it was also designed as an opportunity to preserve our future prosperity… As we enter the next phase of the European Green Deal, one thing will never change: We will keep supporting European industry throughout this transition.
According to Politico this was meant to highlight that the EU’s ambitions when it comes to decarbonization and energy transition and not to ignore their economic implications. If the implications become too much too handle for too many people, the EU will adjust course, Politico concludes.
Politico carries an opinion piece looking at the EU’s announcements last week to investigate China for unfair trading practices when it comes to EVs, and to implement industrial policy to ensure strategic independence when it comes to the minerals that are critical for the energy transition, which effectively was a second announcement targeting China since it dominates the supply chain of these critical minerals. Obviously, China is upset by it all, the opinion piece says. First, it was attacked by the EU (and the US) for not doing enough to tackle climate change. Now, since taking the lead in EVs and the supply chains of minerals that are critical for the energy transition, it is being accused of having done too much and taking too much of a lead. These two positions are irreconcilable. Europe and the U.S. are tasting the bitter fruit of decades wasted when they could have been building the industries of the future, the opinion piece concludes.
In the EPM view, if the EU is to be angry at anyone, it should not be China. Rather, it should be angry at itself and its corporate titans. For the past 15 years they have been sleeping at the helm. The EU industrial policy is “too little too late”, while the EU’s corporate titans chose to spend their time trying to maintain the status quo instead of leading their companies forward amidst changing times. This is what enabled China to take the lead. To now punish China for this position is indeed hypocritical, but also counterproductive when it comes to the fight against climate change. From the later perspective, China should be thanked for acting when the EU and US were not. The fact that the EU and US are not doing this, but instead are trying cut China off, in our view leads support to the view that the entire climate change subject has been crafted by western powers in order to throw up roadblocks for developing nations that threaten the US and EU dominance in the global economy.