Energy, Politics, & Money - 2023.09.22
In this roundup, we take a closer look at Russia’s decision to ban exports of diesel and gasoline, It comes at the moment the global supply / demand balance for the prior is already exceptionally tight, as EPM discussed earlier this week.
As such, while Russia says it instituted the temporary ban to dampen rising fuel prices at home, we suspect the Russian decision cannot be seen as isolated from the global diesel market’s tightness. It is probably designed to create more pain in the western economies that lead efforts to sanction Russia, in an attempt to turn public opinion against this policy objective.
Whether Russia will succeed in this, depends on how long it can maintain the ban. This, in turn, depends on the storage capacity of its refining sector.
Once their diesel and gasoline tanks are full, they will need to slow down operations, which would adversely affect the Russian economy.
Furthermore, we look at:
How speculators have supported the rally in crude oil prices, and continue to push it up to $100
The return to normal operations at Chevron’s two major Australian LNG facilities, following an end to strikes there
The euro zone economy’s contraction this quarter, and why it won't return to growth anytime soon
Why Kishore Mahbubani believes America’s attempt to slow China’s economic development is destined to fail, which EPM agrees with, although we consider his proposed alternative US policy towards China naïve
TotalEnergies’ $300 million investment in a 50-50 joint venture with Adani Green Energy to generate solar and wind power in India
How China became dominant in the solar manufacturing industry, which has given it a leading role in the fight to slow global warming, and what the US is now doing to make up some lost ground in this critical sector
The view of China's top climate official Xie Zhenhua that a complete phasing-out of fossil fuels is not realistic
The EU ban on “climate neutral” and “eco-friendly” claims if they are based on emissions offsetting, where EPM explains why this is important (because lasting popular support for the energy transition is not guaranteed), and how this could potentially affect the energy industry
An investigation into the amount of subsidies China actually pay’s its leading companies in the battery and EV space, which in EPM’s view is nothing spectacular - at least not when compared to the US IRA and the EU Green Deal - which indicates that in our view the EU investigations into China so-called “unfair practices” are just excuses to justify playing geopolitics
General Energy News
Russia has decided to ban exports of diesel and gasoline, writes Bloomberg. So far this year, the nation shipped more than one million barrels a day of diesel-type fuel making it the world’s biggest seaborne exporter. This is an enormous chunk of supply for the market to lose at short notice — roughly enough to meet Germany’s entire diesel demand. The supply loss won’t just matter to oil traders and truck drivers. Diesel-type fuel is also used in ships and trains, as well as by the farming, manufacturing and construction sectors. In short, it powers vast swaths of the global economy.
Earlier this week EPM reported on the exceptional tightness in the global diesel markets, driven by the OPEC+ production cuts, which mostly affects high-diesel yielding crude grades. While Russia says it instituted the temporary ban to dampen rising fuel prices at home, we suspect the Russian decision cannot be seen as isolated from the global diesel market’s tightness. It is probably designed to create more pain in the western economies that lead efforts to sanction Russia, in an attempt to turn public opinion against this policy objective. Whether Russia will succeed in this, depends on how long it can maintain the ban. This, in turn, depends on the storage capacity of its refining sector. Once their diesel and gasoline tanks are full, they will need to slow down operations, which would adversely affect the Russian economy. But until that moment, diesel cracks are already significantly higher in Europe, meaning that pain will be felt there, irrespective of how long Russia keeps this up.
Bloomberg writes that JP Morgan Chase & Co. believes Russia’s ban will last only a “couple of weeks, until harvest concludes in October”. Citigroup’s assessment is for a longer duration, with the ban lasting about six weeks.
Hedge funds are piling into the oil market betting that prices will soon pass $100 a barrel, writes the Financial Times. Exchange and regulatory data suggested hedge fund positioning had exacerbated the near 30 per cent move higher in prices since June, with a surge in buying accelerating in the past two weeks for both Brent and US crude futures. This confirms EPM’s earlier assessment, which was that the oil price rally is on shaky ground. Speculator driven, the slightest “bad news” can cause their exit, which would then cause another steep decline in the price of oil. (EPM also notes, that while Saudi prince and energy minister Abdulaziz bin Salman has often declared war on speculators, in particular when the oil price was on the way down, warning he would burn them, he seems less upset with them now that they are pushing the price up…)
An Australian union alliance on Friday called off strikes at Chevron's two major liquefied natural gas (LNG) projects, agreeing to resolve disputes that had threatened to disrupt around 7% of global LNG supplies, writes Reuters. The union alliance and Chevron accepted proposals on pay and conditions from the country's industrial arbitrator for the Gorgon and Wheatstone LNG facilities, and workers suspended strikes that began two weeks ago.
Macroeconomics
The euro zone economy is likely contract this quarter and won't return to growth anytime soon, writes Reuters and quotes Commerzbank as saying:
A recession is becoming increasingly clear in the euro area. Unlike in the winter half-year of 2022/23, the economic weakness is not concentrated in Germany, which has suffered particularly badly from high energy prices. The increase in the ECB key interest rate by 450 basis points in the meantime is slowing down the economy in all euro countries.
Geopolitics
While the Biden administration denies is, there’s little doubt that the American government has decided to slow China’s economic rise, most notably in the fields of technological development, write Tony Chan, Ben Harburg, and Kishore Mahbubani for Foreign Policy. President Biden has not reversed trade tariffs imposed by Donald Trump on China in 2018, even though as a presidential candidate he criticized them in July 2019. Instead, the Biden administration has increased pressure on China by banning the export of chips, semiconductor equipment, and selected software, persuading its allies like the Netherlands and Japan to follow suit.
More recently on August 9, the Biden administration issued an executive order prohibiting American investments in China involving “sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors”. The big question is whether America can succeed in this campaign. The answer, according to Chan, Harburg and Muhbubani is, probably not.
Since the creation of the People’s Republic of China in 1949, several efforts have been made to limit China’s access to or stop its development in various critical technologies, including nuclear weapons, space, satellite communication, GPS, semiconductors, supercomputers, and artificial intelligence. The United States has also tried to curb China’s market dominance in 5G, commercial drones, and electric vehicles (EVs). All these efforts failed. The ability of Huawei to launch the Mate 60 Pro, a new smartphone powered by a domestically produced 5G chip and operating system, is the best evidence that the chip sanctions are not working. What these attempts to achieve, however, is antagonize China. In response, it is likely to use its dominance in the critical minerals supply chain to “hurt back” the US and its allies.
US interests, and those of it allies, would be better served by a policy targeting establishment of a “sustainable structure for collaboration”, the authors write, which would require a resumption of high-level dialogues, together with the establishment of a high-level science and technology dialogue bringing together the top scientists from these countries. EPM thinks this is a great idea that is unrealistic.
The US, as Britain before it, wants to maintain its position as the leading nation in the world. It is for this reason that it is challenging China, not just economically (and as we often note) but also militarily and diplomatically. The collaboration the authors of this opinion piece call for, would not support the US to maintain its hegemonic position. It might be better for the interests of the world at large, but unfortunately those do not drive geopolitics – national interests do.
Energy Transition & Technology News
French oil major TotalEnergies will invest $300 million in a 50-50 joint venture with Adani Green Energy to generate solar and wind power in India, writes Nikkei Asia. The new entity will be able to generate 1,050 megawatts of power.
A new Bloomberg documentary, “The Hidden Threat to US Energy Security”, explains how China became dominant in the solar manufacturing industry, which has given it a leading role in the fight to slow global warming, and what the US is now doing to make up some lost ground in this critical sector. China’s preeminence is the product of two decades of sustained governmental support, including financial support, that reduced the cost of making solar panels and helped foster end markets. The US response is a copy of the Chinese approach, that is, offer financial support and protection to companies that want to compete with China from an American base.
Climate Politics
According to Reuters China's top climate official Xie Zhenhua says the complete phasing-out of fossil fuels is unrealistic. Xie said the intermittent nature of renewable energy and the immaturity of key technologies like energy storage means the world must continue to rely on fossil fuels to safeguard economic growth. Xie said China was open to setting a global renewable energy target as long as it took the divergent economic conditions of different countries into account. He also said he welcomed pledges made to him by his US counterpart John Kerry that a $100 billion annual fund to help developing countries adapt to climate change would soon be made available, adding it was "only a drop in the bucket". Xie said protectionism could drive up the price of solar panels by 20-25% and hold back the energy transition, and called on countries not to "politicise" cooperation in new energy.
The EU will ban sweeping environmental claims such as “climate neutral” or “eco” by 2026 unless companies can prove the claim is accurate, writes the Financial Times. The rules will also outlaw claims based on emissions offsetting. The rules say “generic environmental claims” that could be banned include phrases such as “green”, “nature’s friend”, “energy efficient” and “biodegradable”, unless the products can demonstrate “excellent environmental performance”. EPM notes this is in fact a regulatory measure against the practice of offsetting, which will put pressure on companies to actually decarbonize their operations. As to how far it will drive this practical decarbonization will depend on whether the European public maintains its concern for the environment in general, and the climate in particular. This, in turn, will depend on developments in the EU economy. In case of a deeper, longer recession, we expect to see more backlash against the climate change agenda in general, and as a result less of a focus by companies on “green” and more of a focus on “affordable”.
On the latter subject, the Financial Times carries an opinion piece by Gideon Rachman who says “Populism could derail the green transition”. The underlying problem, he says, is that most mainstream politicians say that the journey to net zero is not only essential for the environment but will also be good for the economy. The jobs of the future, we are told, will be green jobs. It glosses over the transitional costs, the fact that the switch away from fossil fuels is very expensive – and that in the end this cost will have to be borne by consumers, either directly via price increases or via taxes.
The Electrification of Transport
Because the European commission announced an investigation into China’s subsidies for its EV sector, Nikkei Asia has investigated exactly how and by how much the Beijing offers supports.
Among more than 5,000 mainland Chinese listed companies, five of the top 10 recipients of government grants during the first half of this year were local manufacturers of EVs or the batteries that power them. CATL tops the list, having received 2.85 billion yuan ($391 million) in government subsidies for the six-month period, almost a threefold increase from the year before. EVE Energy, one of CATL's main competitors, also made it onto the list, with a sudden increase in subsidies. The Guangdong-based EV battery maker received 1.08 billion yuan in the first half of the year, about four times more than the year before. Among EV assemblers, Shanghai-listed SAIC Motor was the largest recipient of government assistance, bagging over 2 billion yuan in subsidies, almost double from a year ago. BYD, China's leader in EV sales and set to surpass Volkswagen this year as the country's top-selling auto brand, closely followed SAIC on the subsidy list. It received 1.78 billion yuan in the first half, or close to three times as much as the year before. EPM is neither surprised nor shocked by these findings.
Governments the world over provide support to industries they deem of strategic importance – China has just done this more forward looking than the US and EU. The latter two are now trying to catch up through the IRA and the Green Deal Industrial Plan. Both are very explicit that they offer subsidies to domestic manufacturing only, and implicit about the fact these manufacturing industries are to become exporters. In reality, therefore, this is not about “fairness”, but about geopolitics. The EU could have launched a similar investigation into the US subsidies for battery and EV manufacturers, for example, but it hasn’t. This indicates in our view that the EU investigations into China so-called “unfair practices” are just excuses to justify playing geopolitics.