Energy, Politics, & Money - 2023.10.04
In this roundup, EPM takes a look at:
Whether the global economy can handle oil trading at $100 a barrel
India’s growing anger towards OPEC+ countries, as the oil price increase caused by the production restraint is hitting the country hard
Qatar’s breaking ground on the North Field expansion project; and why TotalEnergies believes LNG prices will see a structural decline towards the end of this decade
The pressures building on real estate investment funds in Europe to sell, which EPM sees as a major risk to the European economy
Ray Dalio’s fear that the US semiconductor sanctions on China are creating a risk for war in the same manner that the US oil sanctions on Japan did in 1941; which, thanks to progressive insight, EPM now disagrees with, and we explain why
China's green tech supply chain in South East Asia
Why the regionalization of the global economy under influence of the US – China competition is a major risk to the energy transition
Sultan al-Jaber, of COP28, saying the oil and gas industry must prepare for an inevitable “phase down” of fossil fuels
Why China’s EV companies are about to devastate Europe’s car industry in the same way Japan’s car companies devastated the US during the 1970s and 1980s
The legal action taken against TotalEnergies in France, over the company’s investment in oil and gas projects
General Energy News
Javier Blas of Bloomberg looks at the question whether the global economy can handle oil trading at $100 a barrel. A triple-digit price tag wouldn’t just mean elevated energy prices, it would also turbocharge the dollar, he says. This combination would likely make for a wrecking ball, as it keeps inflation high, crowding out consumer consumption leading to even tighter monetary policy so that growth around the world would be destroyed. Blas notes the International Energy Agency anticipates that in this scenario, world oil demand would slow down in 2024 to about an extra one million barrels a day, down from 2.2 million barrels a day in 2023.
India, the world's third-biggest oil importer, has been hit hard by the oil price increase that has resulted largely from Saudi Arabia and Russia deciding to implement voluntary production cuts. Indian oil minister Hardeep Singh Puri has met OPEC Secretary General Haitham Al Ghais to discuss the issue, writes Reuters. It quotes Puri as saying:
During pandemic, when crude oil prices crashed, the world came together to stabilize the prices to make it sustainable for the producers. Now, as the world is at cusp of economic recession and slowdown, oil producers need to show same sensitivity towards the consuming countries.
Turning to natural gas, QatarEnergy has finally broken ground on the massive expansion of its North Field, writes Upstream Online. The project aims to raise the country’s LNG production capacity from 77 million to 126 million tonnes per annum (MTPA) by 2026. The two-phased LNG expansion involves six mega trains, each with an LNG production capacity of 8 MTPA, with four of the trains in the North Field East expansion project and two in the North Field South expansion project. In addition to LNG, the project will produce 6500 tonnes per day of ethane. QatarEnergy is partnering with TotalEnergies, Shell, ConocoPhillips, ExxonMobil, Eni, Sinopec, and China National Petroleum Corporation for the expansion project.
During the ground breaking ceremony in Qatar, Patrick Pouyanne, CEO of French energy firm TotalEnergies told reporters that he expect LNG prices to decline towards the end of the decade, writes Reuters. Primary reason is that LNG supplies are expected to increase by around 100 million tonnes per year, or around 20%, by 2030, particularly from new projects in Qatar and the United States.
Macroeconomics
In the cheap-money era, a torrent of cash poured into European property funds. But as it gets easier to find decent returns elsewhere, investors are heading for the exits, adding fresh pressure to Europe’s hard-hit real estate markets, writes Bloomberg. Across Europe, commercial real estate investment plunged 59% in the first half of the year, and signs are increasing investors are eager to get their money out of the funds. This means the incentive to sell properties and raise cash to pay out investors is growing, and for some funds even becoming urgent. In the EPM view, this is a major risk for the European economy. As real estate demand is low due to the increase in interest rates, forced sales by investment funds are likely to put significant downward pressure on real estate prices. Which, as 2008 taught us, can quickly turn into a downward spiral for the broader economy.
Geopolitics
Washington’s restrictions on advanced semiconductor exports to China are similar to the petroleum ban it imposed against Japan prior to the outbreak of war in 1941, says Ray Dalio according to Bloomberg. If you’ve been reading EPM you may recall that at the outset of the US sanctions we referred to this historical precedent to facilitate our thinking as to how things might play out. But, things have evolved since, and so has our thinking. Fortunately for the world, we now say, semiconductors are not like oil. Semiconductors can be “invented”, while oil can not. The recent launch of Huawei’s latest smartphone is evidence that China is very rapidly developing semiconductor capabilities. We say this is fortunate for the world because it means China does not need to go to war in the way Japan did in 1941. Therefore, despite the gradual tightening of US semiconductor sanctions, we are today less worried about war in the Asia Pacific than we were initially 12 – 18 months ago.
Energy Transition & Technology News
Nikkei Asia has a detailed look at China's green tech supply chain in South East Asia. There has been a surge of Chinese investment in the region, it says. From rare-earth mining in Myanmar and battery materials processing in Indonesia, to solar panel production in Malaysia and EV manufacturing in Thailand, Chinese companies are increasingly active in Southeast Asia's emerging low-carbon industries. They include big names such as electric car giant BYD, battery maker Contemporary Amperex Technology (CATL), solar panel producer JinkoSolar and wind turbine manufacturer Goldwind. Behind the trend is the need for natural resources to enable growth. Also of importance is the fact that Chinese companies have to deal with ever more stringent emissions regulations, power supply shortages and production capacity caps at home. In addition, geopolitical considerations play a role, as the host countries often have better trade relations with western markets.
The International Monetary Fund (IMF) on October 3rd released a chapter from its World Economic Outlook, which delves into the impact of geo-economic fragmentation on commodity markets. S&P Global says the key takeaways from the IMF are that:
minerals and some agricultural commodity prices are highly vulnerable in the event of fragmentation; low-income countries will be the most affected in the event of further fragmentation; ... and, with fragmentation in critical minerals markets, the energy transition could become much more costly.
In a world that is fragmented, the prices of critical minerals like copper, nickel, cobalt and lithium would be 300% higher than in a world with fully integrated markets. And those higher costs, he said, would cause roughly 30% less investment in renewables and electric vehicles in fragmented markets, compared with integrated markets. The best option for preventing this would be preventing fragmentation from occurring in the first place. But if policymakers cannot achieve that, the second-best option would be for countries to focus on more narrow agreements for highly critical and vulnerable commodities
Climate Politics
Sultan al-Jaber, president-designate of this year’s UN climate summit, says the oil and gas industry must prepare for an inevitable “phase down” of fossil fuels as he warned the sector should not be seen to work against decarbonisation efforts, writes the Financial Times. Al Jaber says he is in talks with fossil fuel producers about an initiative focused on cutting greenhouse gas emissions that is due to be launched at the COP28 climate summit in Dubai later this year. More than 20 fossil fuel-intensive companies, encompassing up to a quarter of all oil and gas production, are in active talks to sign up to the initiative already, he said. Jaber has previously set a “mid century” timeline for the phase down of fossil fuels used without their emissions being captured, known as unabated fossil fuels. At EPM we think the new plan will have the same key features – and in a way we hope so, because our view is that there are no alternatives to oil and gas that over the next 10 to 20 years can develop the scale needed to remove oil and gas from the global energy equation.
The Electrification of Transport
Nearly half the cars exported from China are now sold in Europe. The figure rose about 60 per cent last year. Around two-thirds were battery electric cars. The historical parallel is with the push into the US by Japanese carmakers in the 1970s — which offers a hint of what may come in Europe, writes the Financial Times. Historically, Europe has exported far more cars to China than it has imported. But the switch to electric cars has brought with it a change in buying patterns. Chinese consumer preference has shifted to domestic brands, accounting for 80 per cent of newly registered electric cars in China. Chinese EV exports to Europe are now growing at a much faster pace than analysts previously anticipated. In south-east Asia, another key market, Chinese automakers dominate, accounting for three-quarters of all EVs sold. That makes Europe even more important in their search for growth.
Other
Four environmental organisations – Darwin Climax Coalitions, Sea Shepherd France, Wild Legal and Stop EACOP-Stop Total en Ouganda – have started legal action against TotalEnergies over the impact of the group's oil pipeline development in Uganda and other fossil fuel projects, writes Reuters. They say the company approved more fossil fuel projects than any other oil major between 2022 and 2025. The environmental groups make four different complaints against TotalEnergies: failing to fight a disaster, involuntary homicide, unintentional injury to persons and destruction or damage of property belonging to a person likely to create a danger to persons. The complaint was filed with the prosecutor's office on Sept. 22 and could lead to a judge opening a formal investigation.