Energy, Politics, & Money - 2023.09.26
In this roundup, we look at:
Why there are doubts oil could sustain its rally to / above $100 per barrel
France’s new national “ecological plan” to reduce greenhouse gas emissions by 55% by 2030, and end the use of fossil fuels, which includes mandatory decarbonization targets for the most polluting industrial facilities in the country
Gordon Brown’s idea to further delay the developed world paying up for the climate change it has caused
Why according to IEA assessment, fossil fuel demand must fall by a quarter by the end of this decade, while the global electricity system needs to triple in size, to limit the rise in global warming to 1.5C – neither of which EPM believes are realistic goals
Why Germany is against using tariffs as a barrier to block Chinese EVs in Europe
Goldman Sach’s decision to continue financing traditional companies for a long time
General Energy News
While oil prices may be near $100 a barrel, a range of factors could prevent a sustained rally above that level, writes Reuters. For Brent to surpass $100 a barrel this year is possible, perhaps even likely in the EPM view, as supply remains constrained while and stocks of fuel and crude are relatively low. And, EPM adds, because speculators are betting on oil making it to $100, which is an important driver of the oil price for the shorter term. Beyond the shorter term, however, there is the effect high oil prices have on inflation and consumer purchasing power. If high oil prices drive inflation upward, it may lead to further raising of interest rates by central banks, which would further depress economic activity. Higher prices for products such as gasoline effectively “crowd out” expenditure by consumers in other sectors of the economy, which is also negative for overall economic growth and thereby energy demand. Beyond these two effects, there is growth in oil supply from non-OPEC countries such as the US, Brazil and Guyana, where there remains a possibility that at some point in time the OPEC+ members agree to undo some of their quota cuts. For all these reasons, EPM believes the current oil prices are unlikely to be sustained very long – either the economy will react, or if it does not, producers will react.
Geopolitics
China appears to have launched an effort to throw a spanner in the wheels of the US plan to create a “three-way” alignment with Japan and South Korea. Nikkei Asia writes High-ranking diplomats from China, Japan and South Korea sat down for a meeting in Seoul on Tuesday in an apparent effort to pave the way for a restart of their trilateral cooperation. The three countries have not held a trilateral summit since 2019, during which time the alignment of Japan and South Korea with the US has become much stronger – and, EPM hastens to add, much more explicitly “military” and focused on “China containment”. Nikkei also reports that Chinese President Xi Jinping has told South Korean Prime Minister Han Duck-soo that he "seriously considers" visiting Seoul. In the EPM view, it would make sense for China to develop a diplomatic effort aimed at “winning friends” in its neighborhood – something it has not been doing very well over recent years. At the same time, we believe the US ties to Japan and South Korea are very tight, and based on a long history. As such, we consider it almost impossible for China to have a real impact in the short to medium term. As far as Japan is concerned there was an opportunity in 2009, with the victory of the Democratic Party of Japan (DPJ) in the national elections based on a more pro-China and anti-US platform (remember the protests against the US military base in Okinawa?), but this was dealt with fairly quickly by the US and aligned forces inside Japan.
Climate Politics
While we have seen the UK and Germany backtrack on important elements of their national decarbonization plans, and while China continues its steady pace forward, France’s president Emmanuel Macron has unveiled a national “ecological plan” to reduce France’s greenhouse gas emissions by 55% by 2030, and end the use of fossil fuels, writes the Guardian. The plan is aimed at addressing the climate crisis while ensuring that France remained competitive in agriculture and industry, said Macron. It is essential, Macron said, that “France reduces our dependence on so-called fossil fuels, coal, petrol and gas, which we don’t produce any more but on which we depend”. The aim, he added, was to reduce this dependence from 60% to 40% by 2030. “The priority that we have set is that by January 2027 we will have totally ended the use of coal for our electricity production,” he said. Other measures in the plan include the acceleration of electric car production, with brakes on gas boilers, though the president stopped short of a total ban. It also includes new projects for offshore wind farms, the opening of several electric battery factories in northern France, a map to establish where natural resources can be found in France, including hydrogen gas and essential elements for lithium batteries, and €700m state investment in the regional train network. Companies responsible for 50 of the dirtiest industrial sites in France are to sign an agreement to reduce pollution by 45% before 2030. Macron said the state would be taking back control of electricity prices next month. He said people would be encouraged to look at alternatives such as heat pumps, promising to triple pump production in the next three years and train 30,000 new installers.
On the topic of financing decarbonization and climate change mitigation in the developed world, former UK Chancellor and Prime Minister Gordon Brown has floated a new idea with the organizers of COP28, writes BBC. You likely know EPM’s view on the subject. We are of the opinion the developing world was tricked into aligning with the climate change agenda, through the offer of $100 billion in support. That support has never materialized, and at present efforts are underway to “change the goalpost” on the subject. The conversation is gently nudged away from “support” and “aid”, to “loans” and “investment”. This will be a major topic at COP28 – how to incentivize the private sector to invest in the developing world, then to count that private investment, over the which the developing world has to pay returns, toward the “$100 billion” promise. Now, as to Gordon Brown’s idea. He wants to take the “trick and deceit” to avoid having to “pay up” a step further. The world's richest oil states should pay a global windfall tax to help poorer nations combat climate change, he says. Only thereafter the world’s rich countries, which are responsible for some 80% of historic emissions, would discuss how much and how they would contribute to support the developing world.
To limit the rise in global warming to 1.5C since pre-industrial times, fossil fuel demand must fall by a quarter by the end of this decade, the International Energy Agency has concluded, according to the Financial Times. In EPM’s view, this explains why the 1.5C target will not be met. It is possible to force such a reduction in supply of fossil fuels, through legislation including (carbon) taxation. It is much harder, however, to drive a decrease in demand, as this requires either forcing a severe downward adjustment of lifestyles (primarily in Western countries) which if attempted should be expected to result in massive blowback from the voting populations in the developed world; or an aggressive buildup of alternative energy solutions, which should be expected to remain significantly more expensive this decade (at least), and as such would require massive subsidies, which in turn would require higher taxes on consumers, and thus also lead to the aforementioned blowback.
According to S&P Global, the IEA in its 2023 version of the “Net Zero Roadmap” identified another roadblock to the world achieving its decarbonization objective. "For all countries, speeding up permitting, extending and modernizing electricity grids, addressing supply chain bottlenecks, and securely integrating variable renewables are critical" it says. A tripling of renewables capacity to 11,000 GW by 2030 is the order of magnitude the IEA is thinking of, coupled with investment in the power grid. In this regard, the IEA says:
The hugely increased need for electricity system flexibility requires massive growth of battery energy storage and demand response; expanded, modernized and cybersecure transmission and distribution grids, and more dispatchable low-emissions capacity, including fossil fuel capacity with carbon capture, utilization and Storage (CCUS), hydropower, biomass, nuclear, and hydrogen and ammonia-based plants.
The Electrification of Transport
German Transport Minister Volker Wissing has rejected possible punitive tariffs as a result of the European Commission's investigation into Chinese electric vehicle (EV) subsidies, writes Reuters. "In principle, I don't think much of erecting market barriers," Wissing told the Monday edition of the Augsburger Allgemeine newspaper. In the EPM view, Germany’s position is connected to the massive interests of its car industry in China. It likely fears that EU tariffs would be reciprocated by China, with the reciprocation likely to affect German car sales in China.
Other
Goldman Sachs CEO David Solomon has defended investment in traditional energy companies, arguing against demands from climate activists to abandon clients in that sector, writes Bloomberg. “Traditional energy companies are hugely important to the global economy, they are hugely important to Goldman Sachs,” Solomon said at the American Energy Security Summit in Oklahoma City Monday. “We are all going to continue to finance traditional companies for a long time.”