Energy, Politics, & Money - 2023.09.25
In this roundup, we look at:
What fossil energy demand is likely to look like after it has hit peak
Why economists, financial markets and most central banks are now of the opinion no further interest rate rises are in the pipeline
The efforts by European Commission trade chief Valdis Dombrovskis to calm the EU’s relationship with China, which EPM believes will be without impact in Beijing
The question, “Will the Russia-Ukraine War lead to World War III?”
Lego’s decision to abandon plans to move from virgin plastics to recycled plastics
Japan’s plan to export CO2 for storage in countries such as Malaysia
The deep rift on show in New York, where the world’s climate negotiators met to test diplomatic language that might be agreed at COP28
Germany’s backtrack on some of its decarbonization ambitions, namely its proposed stringent building insulation standards; which makes it the second country (following the UK) in two weeks to prioritize the economy of decarbonization
The Asian Infrastructure Investment Bank, China’s answer to the World Bank, new “climate action plan”, which will triple its annual lending for projects to fight climate change by 2030
The reality that the EU is now dependent on US natural gas; as well as the discussions in the EU about allowing Russian pipeline gas back into the bloc; which in the EPM view indicates that behind the scenes many EU continue to worry that they will not be able to meet energy demand without Russian energy supplies
General Energy News
Javier Blas of Bloomberg says we spend too much time trying to predict when Peak Fossil Energy Demand will be, and too little time analyzing what the structural decline thereafter would look like. The history of fossil-fuel consumption suggests the years after the peak wouldn’t be the expectation of a quick descent, he says. In other words, for oil, coal and gas, the fall may be gentle and slow.
Russia has succeeded in avoiding G7 sanctions on most of its oil exports, writes the Financial Times, because almost three-quarters of all seaborne Russian crude flows travelled without western insurance in August, which is a lever used to enforce the G7’s $60-a-barrel oil price cap. Russia has built up a so-called “dark fleet” of oil tankers able to operate without western insurance or other services. This has allowed Moscow to obtain higher prices for its oil as the global market has tightened. The average price of Russia’s main export grade, Urals, has risen above $60 a barrel since July.
Macroeconomics
As evidence mounts that global economic activity is slowing, economists, financial markets and most central banks have become convinced that no further interest rate rises will be needed, writes the Financial Times. It quotes one analyst as saying, “We have reached a milestone in the global monetary policy cycle, the global monetary tightening cycle has ended.” Financial markets have got the message: traders now price in no further rate rises from most major central banks and cuts by those in many emerging economies. The change in attitude follows reports of a slowdown in inflation in many countries and OECD forecasts showing that the steep increase in rates and a recent rise in oil prices to around $95 a barrel were generating “increasingly visible” signs of slowing growth.
Geopolitics
European Commission trade chief Valdis Dombrovskis is in China this week. In Shanghai, he said ‘De-risking is not decoupling, and the EU has no intention of decoupling from China”, writes the South China Morning Post (SCMP). The EU has long complained about the trade deficit and a lack of fair access to the Chinese market. The bloc has also prodded Beijing to cooperate on climate change and the conflict in Ukraine. But, the EU’s talk of “de-risking” has caused consternation in China, writes SMCP, and Beijing has demanded clarification as Brussels appears more hawkish in aligning with Washington’s combative approach towards China. In the EPM view, the EU’s trade chief will have the same success as Blinken, Yellen and Raimondo when they visited China. China is not so naïve that it falls for nice words. It is looking at actions on the ground. As such, its current thinking is more influenced by the EU trade investigation into Chinese EVs than by Dombrovskis’ (vague) words and statements.
The National Interest looks at the question, “Will the Russia-Ukraine War lead to World War III?”. The most prominent of theories about how the war is likely to end, are unsupported by facts, it says. Sanctions were expected to force Russia to its knees. But just as sanctions did not achieve regime change in Cuba, Venezuela, Iran and South Korea, it won’t in Russia. Western weapon supplies to Ukraine are expected to inflict such heavy losses on Russia, that the Russian people will eventually rise up against president Putin. But this has never happened in Russia’s long history, and the Russian people are famous for their ability to absorb heavy casualties for a cause they believe in (e.g. WWII). That leaves open scenarios with less desirable outcomes, NI says. If western weapon supplies to Ukraine enable it to push through Russian forces on the front line, this might lead Russia to deploying tactical nuclear weapons to restore the balance. If the West provides Ukraine with longer range weapons to strike at Russian supply lines, Russia too might choose to strike deeper into Ukrainian territory, closer to the country’s border with NATO countries such as Poland. If Russian long-range missiles accidentally strike a target in one of Ukraine’s NATO neighbors, causing significant fatalities, Article 5 invocation would not be out of the question. One significant wildcard is former president Donald Trump, writes NI. If Trump returns to the White House next year, he will likely uphold his promise and cut all aid to Ukraine. He could even apply pressure on his NATO allies to stop their support. In such a scenario, the Ukrainians may reluctantly agree to a ceasefire under disadvantageous conditions.
Energy Transition & Technology News
Lego has abandoned plans to move from virgin plastics to recycled plastics, writes the Financial Times. Using recycled polyethylene terephthalate (RPET) would have led to higher carbon emissions over the product’s lifetime, as it would have required new equipment, the company now says. “In the early days, the belief was that it was easier to find this magic material or that new material” that would solve the sustainability issue, LEGO CEO Christiansen said, but “that doesn’t seem to be there. We tested hundreds and hundreds of materials. It’s just not been possible to find a material like that.” EPM notes that this highlights the tension that exists within the world of plastics between on the one hand fighting plastics waste, and on the other hand decarbonization. Plastics waste management requires collection, sorting and processing, all of which add emissions due to their energy demand – in particular chemical recycling of plastics.
Japan will hold talks with Malaysia on storing Japanese power and industrial plant carbon dioxide emissions in the Southeast Asian nation, with an aim of sending the first shipment in 2028, Nikkei Asia writes. Under the proposed projects, carbon dioxide emitted in Japan would be liquefied and transported by ship for storage at sites in Malaysia including offshore natural gas fields. Fuels with low environmental impact, such as hydrogen or ammonia, would be used to power the vessels. Japan plans to store 120 million to 240 million tonnes of carbon dioxide a year underground -- equivalent to 10% to 20% of current emissions. Feasibility studies for underground carbon dioxide storage are underway in various sites in Japan, including the city of Tomakomai on the northern island of Hokkaido. Malaysia is considered to have a large number of suitable sites that could help Japan diversify its storage options. Introducing CCS technology will require around 4 trillion yen ($27 billion) of investment over the next 10 years and tens of trillions of yen more after that, according to Japanese government estimates.
Climate Politics
As world leaders and top officials gathered in New York ahead of the UN COP28 climate summit in ten weeks, a deep rift was on show between countries that support the expansion of fossil fuels, and those that insist stopping all new development is critical to stabilising the earth’s temperatures, writes the Financial Times. On the fringes of the New York event this week, the world’s climate negotiators tested diplomatic language that might be agreed in Dubai, where COP28 will strive to come to a global agreement. The biggest source of friction is the precise nature of a “phase out” of fossil fuels, and whether this would allow for the expansion of carbon capture technologies, also known as abatement. Climate summits over successive years have failed to agree on this wording.
Last week, the UK took a step back from some of its decarbonization ambitions. This week, it’s Germany. The German government will put on indefinite hold plans to require more stringent building insulation standards, its environment minister Robert Habeck told Reuters. Abolition of the insulation standards has been a top demand of the construction industry, which says the measures are too expensive and put a further damper on the depressed construction industry. "High interest rates and inflation are a heavy burden for the construction industry," Habeck told Reuters, noting that the insulation measures now "can wait".
Meanwhile, China continues to move forward. The Asian Infrastructure Investment Bank, Beijing’s answer to the World Bank, is set to unveil a “climate action plan” this week that will become its top priority and spur a sharp increase in financing, writes the Financial Times. The plan, which is due to be announced at the bank’s annual meeting in Egypt this week, envisages a tripling by 2030 in annual lending for projects to fight climate change. This would make climate finance the bank’s top lending priority, accounting for more than half of the funds it disburses.
The Global Energy Crisis
France continues to struggle with the impact structurally higher energy prices are having on the lives of its citizens. French President Emmanuel Macron said on Sunday the government would ask the fuel industry to sell at cost price and would grant 100 euros ($106.52) in aid to the poorest workers who drive to work, to stem the impact of inflation on households, writes Reuters. "The Prime Minister will bring together all the players in the sector this week and we will ask them to sell at cost price, that is to say that no one makes a margin," Macron said in an interview with France's TF1 and France 2 television stations. "There is something we can work on, is to avoid that there are abusive margins done on refining," he said.
The EU’s top energy official, Ditte Juul Jørgensen, told the Financial Times that without Russian gas, Europe will have to rely on US fossil fuels for decades to come. “We will need some fossil molecules in the system over the coming couple of decades. And in that context, there will be a need for American energy.” US exports of LNG to the EU more than doubled last year, rising to 56 bcm in 2022, from 22 bcm a year earlier. At the end of 2022, Russian gas accounted for 16 per cent of the EU’s gas imports, down from 37 per cent in March 2022.
The EU is looking to make its joint natural gas buying platform permanent, writes Politico. The platform went into effect in April and expires in December. It aims to rein in price rises by harnessing the collective buying power of EU customers. Crucially, it bans purchases from entry points into the bloc used by Russia for its pipeline exports. The proposal for a new permanent scheme eliminates any mention of banned entry points, however, instead opting for a looser provision that would allow the European Commission to “decide to temporarily limit, for a fixed term, offers of natural gas from the Russian Federation or Belarus” under certain conditions including where “necessary to protect [countries’] essential security interests.” This language has upset the more hawkish members of the EU bloc, countries such as Poland, Estonia, Latvia and Lithuania. Responding to their concerns, the EU Commission said it was ready to work on the issue. In the EPM view, all this indicates that behind the scenes many EU continue to worry that they will not be able to meet energy demand without Russian energy supplies.