Energy, Politics & Money - 21 September 2022
Independent analysis of global developments in energy, geopolitics, and money curated just for you!
The biggest news today comes out of Russia, where president Putin announced a partial mobilization to be able to send more troops into Ukraine and threatened nuclear retaliation. This clearly indicates there will not be a quick solution to the Ukraine crisis, and thus that the Global Energy Crisis is likely to remain with us for longer.
Further in this roundup, we explain:
How the western sanctions on Russia are providing China a competitive advantage in energy
Why we are of the opinion the Fed’s monetary tightening will cause a global recession, not just in the US
What the US threat of “secondary sanctions” on countries that refuse to go along with the US/ G7 price cap plan for Russian crude oil could mean for the global energy situation
The efforts at United Nations level to disincentivize financing for fossil fuel products
Why we believe Europe’s efforts to mitigate the impact of the Global Energy Crisis on households and businesses threatens to bankrupt the public sector
General Energy News
Reuters reports OPEC+ is now producing a record 3.58 million barrels per day below its targets, about 3.5% of global demand. Two main factors have been derailing OPEC+'s ability to hit its production targets: the impact of Western sanctions on Russian output and chronic problem with under investment among certain members such as Nigeria and Angola.
China’s spending on Russian energy products hit a record $8.3 billion last month, reports Bloomberg, as the world’s top importer continues to leverage the opportunities created for it by the western embargo on all-things-Russia. Our assessment at EPM is that, first, some of these imports are likely to end up available on western markets again – either directly or indirectly (through enabling Chinese exports of barrels of fuels with a different crude origin); and second, China’s access to discounted Russian energy is giving its manufacturing sector a distinct advantage on the global marketplace.
The Financial Times reports on the disconnect between the narrative of the oil companies – high oil prices are here to stay due to under investment caused by energy transition focused energy policies – and the international futures market which see oil trending downward over the next 5 years. At the root of the issue are diverging views about demand. Yes, supply is tight considering current demand, and unlikely to grow much considering current spending on exploration and development. This will be a bigger issue of demand growth remains robust as the oil companies continue to believe, or a lesser issue if one believes the thesis that (in particular) the electrification of transportation will start to affect demand post-2025.
Democratic Senator Chris Van Hollen and Republican Senator Pat Toomey announced a framework for legislation to impose the secondary sanctions for financial institutions involved in trade finance, insurance, reinsurance and brokerage of Russia oil and petroleum products sold at prices exceeding the proposed cap, writes Reuters. Considering Russia’s pledge to cut sales to any country that follows the cap, this political move would have significant implications for the global supply - demand balance if implemented, as it will even make China and (in particular) India think twice about buying Russian oil.
It is at present a fantastic time to enter into longer-term LNG agreements – if you are the seller! Bloomberg reports Qatar and Germany are continuing to discuss supplies of natural gas, as Europe tries to reduce its dependency on Russia for the fuel. The negotiations regard the volumes that will come available from the North field expansion project, planned for completion by 2028.
Macro-Economics
Over at Asia Times, William Pesek echos two points we made earlier as to how US monetary policy will cause a global recession. First, monetary tightening always causes a recession. Second, US monetary tightening must be followed by most other countries in the world, if they don’t want to see the value of their currencies crater versus the US dollar. So, US monetary tightening will cause a global recession, not just a US one. Now that this insight has become recognized and understood more broadly, we can add a third point of importance for the current situation. This is that the US is not just raising rates, the Fed is already shrinking it balance sheet, i.e. taking dollars out of circulation. This establishes significant upward pressure for the dollar, which means the rest of the world will need to raise rates more to avoid drastic falls in the value of their currency. This applies in particular to countries with substantial US dollar denominated debt, who can not afford devaluations of their currency versus the dollar. All of this means your short to medium term forecast should be based on a severe recession scenario.
The other mega-trend we have been highlighting is the regionalization of the global economy. See below under geopolitics for a further discussion of this subject. As to how this will affect businesses, Nikkei Asia reports Japan's Daikin Industries plans to establish a supply chain to make air conditioners without having to rely on Chinese-made parts by March 2024. As to how Daikin will do this, Nikkei Asia reports the company will start to manufacture more parts in-house, while working with remaining suppliers to have them also move manufacturing outside China.
Geopolitics
The biggest geopolitical news of the days is Russia announcing a partial mobilization to be able to send more troops into Ukraine. According to NBC News, president Putin clearly expressed a determination to annex the eastern parts of Ukraine currently under control of its troops, and threatened nuclear retaliation if “the West” were to escalate support for Ukraine as it fights to win these areas back. This clearly indicates there will not be a quick solution to the Ukraine crisis, as neither Ukraine nor Russia will back down. Thus that the Global Energy Crisis is likely to remain with us for longer.
We have highlighted the semiconductor industry as a “canary in the coalmine” for how the US - China geopolitical conflict will be affecting business globally, i.e. regionalization of the global economy. On the topic, Asia Times reports South Korea appears intent on not being forced into picking sides by the US. The US has the “Chip 4 initiative”, aimed at forming a semiconductor industry alliance with Japan, South Korea and Taiwan to coordinate efforts in supply chain management, R&D, subsidies and other aspects of the business, widely regarded as an attempt to exclude and contain China. This makes sense from the US perspective, but creates a significant problem for South Korea as its economy to a large degree depends on exports to China. Our expectation at EPM is that the US will use its political influence to force South Korea to fall in line with US geostrategy, and thus gradually move towards a complete severing of ties with China as far as semiconductors – probably “kicking and screaming” all the way…
Energy Transition & Technology News
The Financial Times has a special report on the subject energy transition that you might want to take a look at. Through a set of articles, it covers very broad ground, from nuclear, through renewables, to electric mobility and CCUS.
Bloomberg discusses the ambition of the global aviation industry to go Net Zero. The resulting plans are primarily based on Sustainable Aviation Fuel and offsetting. The problem is, there’s not nearly enough SAF to go around nor will there be, will offsetting has become socially unacceptable.
Climate Politics
Over at Nikkei Asia a thoughtful opinion piece on how the region should manage the Energy Transition. Being the one major economic region whose energy usage is forecasted to grow significantly over coming decades, it probably can not afford to put all its eggs in one basked. It will need an “all inclusive” energy policy that leverages all energy sources available to it, including fossil fuels, nuclear and renewables.
US climate envoy John Kerry is pushing for a major overhaul of international finance to fight climate change, a message that was echoed by UN secretary-general António Guterres who in addition called for a global windfall tax on the profits of oil and gas companies, reports The Financial Times.
The Global Energy Crisis
The European bail out of households and companies during the Global Energy Crisis is threatening to become larger than the bailout of the banking system during the Global Financial Crisis. Bloomberg reports that on top of the £100 billion reserved for household support, the UK has also prepared £40 billion in support for companies. The support is for 6 months. As evidenced by Russia’s “doubling down” announced today, the energy crisis is likely to last much longer in Europe. This leaves us with some critical questions. Is Europe able to finance a bailout for longer than 6 months? What would happen to public debt, EU monetary policy, the value of the euro and inflation if it tries?