In this roundup, we take a closer look at the current state of the war in Gaza. Thomas Friedman of the New York Times confirmed EPM’s analysis that the US wants to use the attack by Hamas to bring Israel back in line with the US strategy for the Middle East: formal agreements between Israel and the other countries in the region, which requires a permanent settlement of the Palestine problem, to enable a US re-focus to Asia.
The Biden and Blinken visit to Israel last week was designed to do just that. But according to Friedman, the US was not as successful as it had hoped in this regard.
The right wing in the Netanyahu government and the Israeli military are in a state of rage and just want bloody revenge on whoever they consider an enemy. This creates the risk of escalation which EPM in its first analysis downplayed, as we were confident the US had the leverage to drive decision-making in Israeli elite circles.
We still believe it has this ability, but we considering the Israeli resistance coupled with the US internal disfunction, we are now less convinced the wiser elements in the US security established will be able to prevail. As a result, our base case outlook remains “controlled conflict” and a gradual improvement of the situation from here, but the risks to this outlook have increased we believe.
Furthermore, we look at:
India’s imports of Russian oil, which at 1.76 million barrels per day, now makes up 40% of the total
The percentage of Americans falling behind on their auto loans, which is not at the highest rate in nearly three decades
China’s economic outlook for 2024
The likely promotion of the author of Obama’s “Pivot to Asia” strategy to second-in-command at the State Department
The European Union commitment to following the US grand-strategy, meaning fight Russia via Ukraine and de-risk/de-couple from China
China’s response to the US geostrategic strategy against it, which is introduction of export controls on minerals critical to the energy transition, this time graphite, following germanium and gallium earlier this year
How Americans perceive different aspects of US geopolitics, which highlights majority support for diplomacy over war, except in the case of China
The 5th update of Michael Liebrich’s “Hydrogen Ladder”
Chevron CEO Mike Wirth’s defense of his company and industry, in the face of criticism from climate activists
Toyota’s nearing of mass production of solid-state batteries
Europe’s fears that the Gaza War will cause its gas crisis will return to haunt the EU economy again
General Energy News
Oil prices again increased last week, driven by fears of escalation in the Gaza War. Reuters writes, for the week both Brent and WTI rose over 1%, a second straight weekly jump. Brent settled at $92.16 a barrel and WTI at $88.75 a barrel.
The share of Russian oil in India's overall imports rose to about 40% writes Reuters. India imported on average 1.76 million barrels per day (bpd) of Russian oil from April to September, more than double the about 780,000 bpd in the same year-ago period.
Macroeconomics
Americans are falling behind on their auto loans at the highest rate in nearly three decades, writes Bloomberg. The percent of subprime auto borrowers at least 60 days past due on their loans rose to 6.11% in September, the highest in data going back to 1994. Behind the surge is both higher car prices and borrowing costs. And with the Federal Reserve indicating it plans to keep rates higher for longer, the problem is likely to persist, especially as millions of Americans recently started paying their federal student loans again.
The South China Morning Post reviews China’s economic outlook for 2024. While the country is on course to hit its ‘around 5 per cent’ economic growth target for 2023, but many institutions have cut their 2024 forecasts to 4.4 per cent or lower. Overcapacity in the electric vehicle and other sectors, the ailing property market and mounting local government debts are likely to be its main challenges.
Geopolitics
We start the EPM review of the geopolitics relevant for the markets with the war in Gaza. You may recall that at the start of the conflict we said, the US would use the Hamas attack on Israel to pressure Israeli Prime Minister Netanyahu to follow the US plan for the Middle East more closely. This requires him to drop the right-wing parties in his cabinet, establish an emergency government with the mainstream opposition parties, set Israel back on track toward the US proposed “two-state solution”, and sign an agreement with Saudi Arabia – all such that the reality on the ground in the Middle East would become stabilized, to enable the US’ long desired pivot to Asia.
We were struck by Thomas Friedman’s column for the New York Times over the weekend, as based on US government sources, it clearly says that indeed, behind the scenes that was the US plan and the reason for the Biden and Blinken visits to Israel. Both Biden and Blinken pleaded with the Israel leadership to learn from the US mistakes following 9/11, Friedman says. The underlying message being, don’t start a war out of rage and anger, without a clear objective in mind. But, Friedman says based on conversations with senior US officials, Biden failed to get Israel to hold back and think through all the implications of an invasion of Gaza for Israel and the United States.
Apparently, the Biden team left Israel feeling that while Prime Minister Netanyahu understands that overreach in Gaza could set the whole region ablaze, his right-wing coalition partners and military leaders are eager to strike out all they presume enemies. This is why on the West Bank last week at least Israel soldiers killed 3 Palestinians while settlers killed 7 Palestinians more, and why the Israel army has been shelling the West Bank, Hezbollah positions in Southern Lebanon, and airports in Syria.
Friedman is exceptionally concerned that this behavior based on anger and hate will create an insurmountable problem for the US. He says
The hour is late. I have never written a column this urgent before because I have never been more worried about how this situation could spin out of control in ways that could damage Israel irreparably, damage US interests irreparably, damage Palestinians irreparably, threaten Jews everywhere and destabilize the whole world. I beg Biden to tell Israelis this immediately — for their sake, for America’s sake, for the sake of Palestinians, for the sake of the world.
What Friedman fears is that the Israel thirst for revenge will lead to anger that ignites a fire in the countries surrounding it. The Iranian leadership has held back its militias so far, writes Friedman, but if Israel goes too far, it might simply lose the ability to hold them back.
EPM notes that last week we discussed the Bloomberg report that said the governments of the Middle East are under severe pressure from their people to militarily intervene – something they do not want to do in our EPM view. In summary, therefore, Friedman fears a downward spiral of violence. In the best case, this would require the US to intervene, which would severely stretch its military and thus create a problem for its objectives regarding Ukraine and Taiwan. In the worst case, this would lead to revolts in the Middle Eastern countries and all-out war in the region.
Now then to the EPM perspective. We have never seen a Friedman column communicate that much sincere worry and fear. And, we fully agree with his view on how things could develop if Israel does not act rationally and in a controlled manner. At the same time, we are of the opinion the US has more than sufficient leverage over Israel, and as such it can prevent Israel doing what it should not be doing (from the perspective of the US grand-strategy perspective). The main problem for the US, as we see it, is the dysfunction of the US political system, which has caused the situation that the country can not be counted on to act in accordance with what a professional analysis of its situation prescribes.
US President Joe Biden is expected to nominate his top White House Asia aide Kurt Campbell to serve as deputy secretary of state, writes Reuters. Campbell is viewed as the intellectual author of former US President Barack Obama's "pivot to Asia" strategy. He outlined his approach to Asia in a 2016 book "The Pivot" which advocated strengthening existing alliances and building closer relations with states like India and Indonesia in the face of a rising China. Campbell now serves as White House coordinator for Indo-Pacific affairs. During the Obama administration, he was assistant secretary of state for East Asian and Pacific affairs. At the White House, Campbell has overseen the relationship with China.
Nikkei writes that at a meeting in Washington DC the European Union again committed itself to following the US grand-strategy, meaning fight Russia via Ukraine and de-risk/de-couple from China. While calling on Beijing "to engage with us," the two sides called on China "to press Russia to stop its war of aggression, and immediately, completely and unconditionally withdraw its troops from Ukraine." They also laid out several principles to enable sustainable economic relations with China. Those include pushing for a level playing field, protecting advanced technologies that could be used to threaten global peace and security, and reducing critical dependencies and vulnerabilities.
China announced that it will require export permits for graphite, a key material for electric vehicle (EV) batteries, starting December 1, writes Nikkei. The move follows earlier restriction on the export of germanium and gallium. China is the world's top graphite producer, and the move could spur procurement difficulties for global EV makers. Graphite, one of the most widely used materials for EVs, is used in automotive anodes, the negatively charged portion of the battery. China makes up about 65% of global production of this key material. In particular, Chinese companies are believed to hold over 80% of market share in negatively charged materials for automotive batteries, in which high-purity graphite is essential. In Europe the step is seen as a response to the investigation the EU announced into unfair Chinese trade practices in EVs. Most likely, Northvolt, an emerging battery company headquartered in Stockholm and “EU champion” in the field, may have trouble procuring graphite and anode materials, which could possibly damage plans to increase production. "It will be difficult to establish a supply chain outside of China immediately," an executive of an European company said. "Export restrictions can potentially be a bottleneck for the expansion of EV production," he added.
The Eurasia Group Foundation's latest survey report, titled “Order and Disorder: US Foreign Policy in a Fragmented World,” contains several notable findings about how Americans perceive different aspects of US global engagement, writes Responsible Statecraft. One of the chief findings is that Americans are broadly in favor of direct diplomatic engagement with adversaries Two-thirds of Americans favor negotiations with adversaries even if they are responsible for human rights abuses, authoritarian governments, or home to terrorist organizations, 77% support continued nuclear talks with Iran, and 58% of Americans also want the US to push for a negotiated settlement to end the war in Ukraine. China is the outlier, however, as 60% of Americans say they support direct US intervention in a war over Taiwan. This is a major shift in US public opinion in the last ten years, RI notes, which also says that it suggests that the US public does not fully grasp how costly and dangerous a war with China would be.
Energy Transition & Technology News
Michael Liebrich has published the 5th update of his “Hydrogen Ladder”, where he assesses the potential applications of hydrogen. The key messages of the Ladder remain unchanged. There are better and worse use cases for hydrogen, and in the majority of cases there are cheaper, safer and more convenient zero-carbon alternatives. Three uses cases have been promoted: Jet Aviation, Regional Trucks and Short Duration Grid Balancing.
Climate Politics
The Financial Times writes that to Chevron’s critics, who range from Just Stop Oil protesters to the governor of its home state and the president of the United States, the $300bn US oil and gas major exemplifies an industry recklessly promoting products it knows are warming the globe while greedily pushing up petrol prices. But to its chief executive, Mike Wirth, the business he joined 41 years ago is “selling a product that has changed the quality of life on this planet for the better.” And says, the company needs to engage with its critics “to be part of the solution” He concludes, “But that can’t deter us from what we do. We are not selling a product that is evil. We’re selling a product that’s good.”
The Electrification of Transport
Toyota is nearing mass production of solid-state batteries, writes the Financial Times. Solid-state batteries have long been heralded by industry experts as a potential “game-changer” that could address EV battery concerns such as charging time, capacity and the risk of catching fire. If successful, Toyota expects its electric cars powered by solid-state batteries to have a range of 1,200km — more than twice the range of its current EVs — and a charging time of 10 minutes or less. According to Toyota, one of the most critical and difficult technologies for mass production is the assembly process, in which the layers of cathode-anode cells need to be stacked quickly and with high precision, without damaging the materials. When asked whether Toyota was now able to produce solid-state batteries at the same rate as current lithium-ion batteries, a Toyota engineer said: “In terms of the stacking speed, we are almost there. We are going to roll out bigger volumes and check the quality.” Toyota expects to mass-produce solid-state batteries by 2027 or 2028.
The Global Energy Crisis
Although storage is full, the EPM view on Europe’s gas crisis is that it remains a crisis, because Europe needs everything on both the demand and the supply to go perfect for it to get through winter without massive price increases and/or supply interruptions. Europe knows this well, and that is why the events in Gaza are a cause of alarm. The EU is now weighing whether to prolong an emergency gas price cap introduced in February amid fears that the conflict in the Middle East and sabotage of a Baltic pipeline could push up prices again this winter, writes the Financial Times. The cap was introduced after many weeks of tense discussions among member states, with Germany and Austria having initially opposed its introduction arguing that it would distort markets and aggravate a supply crunch. Member states ultimately agreed that the ceiling would come into force if prices hit €180 per megawatt hour for three consecutive days.