Energy, Politics & Money - 2024.04.02
Non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & curated from leading global sources & resources.
After a long Easter weekend, we welcome you back to EPM!
In our daily look at the interconnected worlds of Energy, (Geo)Politics and Money. Curated from the world’s leading sources of information, we take a closer look at Israel’s attack on the Iranian embassy in Damascus, Syria. Seven Iranian military advisers, including three senior commanders, were killed in the attack, including Mohammad Reza Zahedi, a senior commander in its Quds Force.
As to why Israel would undertake such an act - a violation of international law - we at EPM note Israel has been on an escalatory trajectory for a while. It first killed individuals of groups connected to Iran; then Iranian officials maintaining these connections; and now a formal institution of the Iranian state. Previously EPM expressed the view Israel is looking to escalate for two reasons: continued war is needed for the Netanyahu-aligned faction of the Israeli political elite to remain in power; and, Israel believes the United States will join a broader Middle Eastern war on its side. With the US’ backing it believes that it could win this war, weaken surrounding countries, and get better terms than the Abraham Accords the US is pushing.
As to how Iran is likely to respond, EPM notes that in previous instances the United States convinced its political elite not to respond. We believe the same will happen this time.
As to what impact this will have on geopolitics, and from there the energy markets and the global economy, we believe the main impact will be further erosion of Israeli and United States soft power around the world, which has the potential of changing the global power balance; and increased pressure on the ruling elites in countries such as Egypt, Jordan, Saudi Arabia, Iran and Iraq, which could potentially trigger an “Arab Spring” like event with have dramatic consequences geopolitics, the global energy markets and the global economy.
Photograph by Viktor Hesse at https://unsplash.com/@vikhesse
Furthermore, we look at:
The recent increase in crude prices, which of course will play a factor in the OPEC discussions scheduled for this week
The current state of FID investment in new oil fields, which reached 8 billion barrels of reserves in 2023, and is expected to achieve 31 billion by 2030
Qatar’s push in the shipping side of its LNG business
The insightful Ray Dalio analysis of the Chinese economy, utilizing his “big cycle” theorem; which, EPM believes, provides you with an excellent yardstick to judge the Chinese efforts to deal with its economic problems
The change in Russian rhetoric regarding the War in Ukraine, which now describes its “special military operation” as a war, and accuses NATO be an active participant in this war; where EPM looks at what this really means and indicates
Why over half of Southeast Asians would now prefer to align with China over the U.S. if ASEAN were forced to choose between the rival superpowers
Why Goldman Sachs believes the electrification of transport will make road transportation fuel demand peak by around 2032; why this will leave 20% of the world’s refining capacity facing the threat of closure; and why this is a major challenge for China’s refining industry. EPM explains why this is less of a “bad news” story than it is made out to be and what refiners can do to avoid this fate
Why the world’s leading banks are not really acting upon their stated commitment to end financing for fossil-based projects
General Energy News
US CRUDE AND POSSIBLE OPEC CUTS
US WTI crude futures have hit $85 a barrel in New York, for the first time since October, writes Bloomberg, as OPEC+ supply cuts underpin a steadily strengthening market.
With OPEC meeting this week, all eyes will be on what it decides regarding its production quota cut. Bloomberg says most market players expects it to maintain its current level of cuts.
HYDROCARBON FDI FOR 20 NEW OIL FIELDS IN 2023
At least 20 new oil and gas fields reached final investment decisions worldwide last year, totaling 8 billion barrels of oil equivalent in reserves, writes the Financial Times. The source of the data, Global Energy Monitor, an environmental research group, expects this figure to grow nearly fourfold by the end of the decade, with another 31 billion boe across 64 new fields permitted by 2030. The US leads the world in approvals of new oil and gas reserves in the past two years, with ConocoPhillips’ controversial Willow project in Alaska marking the largest approved project in the country. Outside of the US, Guyana and the United Arab Emirates lead in new project approvals. Among the largest approved projects include Abu Dhabi National Oil Company’s Hail and Ghasha gas field and ExxonMobil’s Yellowtail offshore development in Guyana.
QATAR CONTINUES LNG MARKET EXPANSION PREPARATIONS
As to LNG, QatarEnergy has signed four agreements to charter 19 liquefied natural gas carriers from Asian ship operators, writes Bloomberg. The deals are linked to the country’s plan to ramp up LNG output from the North Field, to 142 million tons by 2030 from 77 million tons currently. QatarEnergy signed another charter deal for 25 LNG carriers from Qatar Gas Transport Company, also known as Nakilat earlier this month. In addition to chartering vessels, it owns a fleet of LNG carriers. In 2020, it signed landmark deals worth $22 billion with Korean and Chinese shipbuilders.
Macroeconomics
DALIO AND THE BIG CYCLE THEORY EXPLAINING CHINESE ECONOMY
Ray Dalio has shared his analysis of the Chinese economy, utilizing his “big cycle” theorem, on Linked. The most joyous and productive environments are ones that have freedom, civility, and creativity, and ones in which people can make their dreams into great realities with prosperity that is shared by most people, he says. This happened in China from around 1980 until around five years ago. It is quite typical for such booms to produce debt bubbles and big wealth gaps that lead the booms to turn into bubbles that turn into busts. That happened in China at the same time as the global great power conflict intensified, so China is now in the post-bubble and great power conflict part of the Big Cycle. The overarching objective of China’s policymakers should now be “beautiful deleveraging”, Dalio says. He describes this as a deleveraging, which is deflationary, depressing, and will reduce the debt burden; coupled with an easing of monetary policy which is inflationary, stimulative, and will ease the debt burden. It is very difficult and politically dangerous to do because it engineers big changes in wealth, which is politically challenging, especially during a difficult time such as China is facing now because of its competition with the US. But, Dalio says, “if the leadership doesn’t execute a beautiful deleveraging, China will have a Japanese-style lost decade with Marxist characteristics”. EPM would like to note that in our view, Dalio’s theorem provides you with an excellent yardstick to judge the Chinese efforts to deal with its economic problems.
Geopolitics
EPM SPECIAL ANALYSIS - ISRAEL ACTS ON PLANS TO ESCALATE WAR IN MIDDLE EAST
Israel has caused a further escalation in Middle East tensions, as its warplanes attacked the Iranian embassy in Damascus, Syria, on Monday. Reuters writes that seven Iranian military advisers, including three senior commanders, were killed in the attack. Among them was Mohammad Reza Zahedi, a senior commander in its Quds Force, which is an elite foreign espionage and paramilitary arm. Iran's U.N. mission pointed out that the is a "flagrant violation of the United Nations Charter, international law, and the foundational principle of the inviolability of diplomatic and consular premises." EPM notes that this is a next step in Israel’s escalatory behavior. Over the past few months, it has performed cross-border attacks on private individuals in Lebanon and Syria, because of their affiliation with armed groups aligned with Iran. To this it added attacks on Iranian officials operating in Syria, because of their relations with these armed groups. Now it has gone another step further by attacking an embassy.
As to why Israel decided to perform what under international law can only be classified as an “act of war”, EPM previously said that we believe it is looking for an escalation. The political Israeli elite surrounding prime minister Netanyahu knows its position will become very instable once the fighting in Gaza ends. That is their selfish interest in driving escalation. But connected to that interest is their vision for an Israel which stretches “from the river to the sea”. Achieving that would be greatly helped by a wider war in the Middle East, in which the United States actively engages on the side of Israel. Such a war would severely weaken the countries surrounding Israel, we believe is the Israeli calculation, enabling Israel to get more concessions from these countries in peace negotiations.
As to how Iran is likely to respond, the US will decide this. Iran's Foreign Minister Hossein Amir Abdollahian said a Swiss diplomat representing U.S. interests in the country had been summoned by Tehran, and that "an important message was sent to the American government as a supporter of the Zionist regime (Israel)". From previous instances of recent month we know that the US will ask Iran not to retaliate in order to avoid escalation. Our EPM expectation is that Iran will again do as requested by the US, and thus swallow its pride despite undoubtedly strong Iranian public pressure to do otherwise.
Our last point is that these actions will not be without longer term implications. Israel’s War on Gaza has fundamentally changed the way the world looks at Israel. It has wasted most of the goodwill it had with the global public. Our assessment is that is now seen as a criminal aggressor by most people around the world, which will make it harder for political elites around the world to continue their active military and diplomatic support for Israel. The US support for Israel throughout this period, not only its refusal to punish it for committing war crimes but also its active military and diplomatic support while Israel committed a range of crimes under international law (which the Biden administration is continuing as per the Washington Post), is eroding the US standing globally, as well as the support for the US-established “rule based international order”. US soft power, its ability to get others to do the things it wants them to do, is already visibly on the retreat, we believe. Lastly, while the US will most likely be able to calm Iran’s political elite down, sentiment on “the Arab street” is beyond its control. Therefore, the Israeli and US actions, even though an all-out war between Israel and Iran will most likely be avoided, are nevertheless increasing pressure on the regimes of the Middle East that are mostly pro-US and pro-Israel despite the wishes of their populations. This increase the risk of popular uprisings in the Middle East, akin to the Arab Spring of 2012, that would fundamentally alter the geopolitical landscape with potentially far reaching implications for energy markets and the global economy.
ISRAEL ATTACKED WORLD KITCHEN CENTRAL
Furthermore, Israel attacked the NGO World Kitchen Central, writes Reuters. EPM notes that this is the NGO that, in coordination with the Biden administration, has been shipping aid from Cyprus to Gaza over recent weeks. 7 aid workers were killed in the attack, including citizens from rom Australia, Britain and Poland.
RUSSIA’S RHETORIC DESCRIBING WAR IN UKRAINE CHANGES
As to the War in Ukraine, EPM notes a distinct change in rhetoric coming out of Russia. In response to the Crocus concert hall terrorist attack, Reuters reported that Russian officials started to describe the “special military operation” in Ukraine as a war. Now, Reuters writes, Russian Security Council Secretary Nikolai Patrushev, one of Putin's most powerful allies, has said that "The North Atlantic Alliance is de-facto a party to the Ukrainian conflict and is actively involved in organising the shelling of Russian territories". This is, in the EPM view, factually correct, and certainly not something the Russian’s were previously unaware of. In other words, in our view Russia has chosen to now publicly expose the fact that NATO is an active participant in the conflict. What this really means and indicates, in the EPM view, is escalation. Russia did previous not attract attention to the fact of NATO involvement, although there is this involvement and Russia was aware of it, to prevent escalation. Now that Russia is pushing it into the open, we would not be surprised to see actual evidence coming from the Russian sometime soon. This would be a step towards Russia ending its careful approach when it comes to NATO member state related operations in Ukraine, and might even lead to Russia actively targeting those centers – such as the British soldiers supporting Ukraine with the Storm Shadow missile operations (inadvertently revealed by Germany’s chancellor Olaf Scholtz not too long ago.)
US LOSING PREFERRED MILITARY POWER ALLY STATUS IN ASIA
Over half of Southeast Asians would now prefer to align with China over the U.S. if ASEAN were forced to choose between the rival superpowers, a regional survey by a Singapore-based think tank showed, writes Nikkei Asia. According to the State of Southeast Asia 2024 survey, compiled by the ISEAS-Yusof Ishak Institute, 50.5% of respondents opted for China and 49.5% preferred the U.S. if ASEAN had to pick sides -- the first time Beijing edged past Washington since the annual survey started asking the question in 2020. Last year's survey showed 38.9% preferred China and 61.1% chose the U.S. among the 10 countries of the Association of Southeast Asian Nations, the possible alignment to China was most evident among respondents from Malaysia, at 75.1%, followed by Indonesia and Laos at 73.2% and 70.6%. The research further noted that a majority of people in ASEAN see China as the most influential economic actor, and prefer not to have to choose between the US and China.
In the EPM perspective, this is an example of why we have said the US geopolitical actions will not be without consequences. For example, while China is pushing for increased trade via its Belt and Road initiative, the US is asking countries to reduce its trade with China. In our view, the US stance in Israel’s War on Gaza will further reduce its global standing, in particular in Muslim countries such as Indonesia and Malaysia.
Energy Transition & Technology News
OIL TO PEAK IN 2032
Global road oil demand will rise 5% to a peak of 50 million barrels per day by 2032, Reuters writes based on a Goldman Sachs forecasts. The investment bank sees global road oil demand edging down along a long plateau after the peak and remaining 4% above 2023 levels by 2040, as a rise in the global number of vehicles nearly offsets the decline in oil consumption per vehicle. Oil consumption per vehicle is forecasted to decline because electric vehicles are expected to account for more than half of auto sales by 2040.
20% OF WORLD WIDE REFINING ASSETS TO BE STRANDED
Related, this trend will leave 20% of the world’s refining capacity facing the threat of closure, writes Reuters based on a Wood Mackenzie analysis. WM assumes that lower gasoline demand, due to the electrification of transport, will lead to lower gasoline cracks, while decarbonization adds costs to operations. Europe and China house the greatest number of high-risk sites, totaling about 3.9 million barrels per day (bpd) of refining capacity. EPM would like to make a few points. First, the WM assertion would be just market forces at play, if indeed gasoline demand drops and decarbonization is made compulsory. We do not see it as much of an issue, therefore – less demand will simply require less supply. As to the latter point of higher costs, this is likely to translate (in part at least) into higher product prices for consumers. Which is why we do believe the world is on a “nice and even” road toward this possible future. We expect to see a lot of pushback continuing, all the more when the actual costs of decarbonization start to affect the prices of goods and services. The regions where the electrification of transport is going the fastest, i.e. China and Europe, would obviously be more affected. But lastly, refiners should not sit still and wait to die a slow death. In the future scenario underlying the WM analysis, decarbonization actually becomes a competitive advantage – who can do it better and cheaper can deliver higher profits. And while demand for gasoline is likely to drop, demand for jet, marine fuel and petrochemical feedstock is likely to increase. True, all refiners are / will try to move into those products. That will make cost profile (scale and feedstock!) and cost management the determinants for future success – indeed, as it has almost always been in refining.
The challenge is the biggest in China, where the electrification of transport is going the fastest. China’s state-owned oil companies together operate about 50% of the more than 100,000 gas stations in China and fuel sales account for almost half of their revenue, writes Reuters. They are now pushing into EV charging, to offset the coming decline in gasoline revenues. But, most Chinese EV owners have the ability to charge their vehicles at home, Reuters notes. Which makes the push into road side charging highly speculative.
Other
LEADING WORLD BANKS ARE NOT ABANDONING HYDROCARBON PROJECTS
According to Bloomberg, the world’s leading banks are not really acting upon their stated commitment to end financing for fossil-based projects. In part because many see the societal demands regarding decarbonization as unrealistic. But also because the fees associated with these projects are just too good to give up. As a result, banks that had enthusiastically committed to align their entire operations with net zero goals are having second thoughts as the real-world ramifications of acting on those pledges become painfully apparent. For this reason, in February, a string of financial heavyweights, including JPMorgan Asset Management, Pacific Investment Management and State Street Global Advisors, withdrew from Climate Action 100+, the world’s largest investor group formed to fight global warming. HSBC decided to withdraw applications to get its climate goals certified by the United Nations-backed Science Based Targets initiative. Deutsche Bank, HSBC and Bank of America are adding caveats to their restrictions on financing coal.