Energy, Politics & Money - 22 May 2023
In this roundup, we attempt to make sense of all the geopolitical events over the weekend. The US and EU agreed to start training Ukrainian fighter pilots in the use of western jets. At EPM we believe this provides a clear indication of where the US is steering the conflict, which is escalation. The training decision is not a knee-jerk reaction to the fall of Bakhmut, namely, but a (EPM expected…) step aligned with earlier statements and announcements going back to the summer of 2022. This escalation is dangerous, we believe, in particular for European interests – the war will be fought on its territory, hinder its access to affordable energy, and require it to redirect spending away from the economy towards defense. Further east, the G-7 issued its communique, which is clearly focused on China. While it uses the European proposed “de-risking” rather than the US proposed “de-coupling”, it clearly indicates a collaborative effort on the part of the G-7 nations against China. Meanwhile, it presents Taiwan as an “international issue” rather than as the “internal Chinese issue” that China sees it as. Both of which have very much angered China. In all, therefore, the geopolitical events of the weekend point to escalations in tensions, taking the world yet another step closer to hot war. This is not going unnoticed in the countries that aim to be unaligned, and explains why many of them, such as India and Brazil, refuse to go along with the narratives coming out of Washington, London, Beijing or Moscow, stressing the need for de-escalation and peace talks above all else.
Furthermore, we look at:
- Continued decline in crude oil prices, primarily due to trader concerns over the US debt ceiling talks, which leaves Brent at risk of posting a fifth straight monthly loss in May
- A contrarian view regarding Chinese growth potential, which argues that the country’s ability to further inflate the debt bubble is limited, which considering the circumstance of a declining population, means the country is unlikely to achieve its 5% targeted GDP growth
- The view of Germany’s former foreign minister Joschka Fischer that Europe must work to become a global power, which APM is a good analysis, but that misses the key issue facing Europe: a lack of independent thinking in geostrategy and geopolitics
- The view that the Punic Wars between Carthage and Rome are the historical event that best compares to the current conflict between the US and China
- ExxonMobil’s entry into lithium mining
- The extraordinary journey of China’s PV industry over the past 20 years
- The view of Julio Friedmann, advisor on energy policy to the Biden White House, on the economics of Direct Air Capture, and what this means for the energy system of tomorrow
- A review of the pros and cons of concentrated solar technology
- The fast approaching entry of China’s world leading EV brands into the US
- A critical review of the Science Based Targets initiative, or SBTi
General Energy News
Crude oil prices are in decline, as investors worry about the debt ceiling talks in the US. The global crude benchmark Brent is now at risk of posting a fifth straight monthly loss in May, writes Bloomberg. Brent is now slightly below $75 per barrel, while WTI is trading around $71 per barrel.
Macroeconomics
An opinion piece at the Financial Times looks at the unrealistically optimistic growth forecasts for China, developed by investors after the country announced an end to Covid measures. Hopes for a reopening boom were based on the premise that, once released from lockdown, Chinese consumers would go on a spending spree, it says. In reality, what has been happening, it says, is that corporate revenues have been growing slower than officially stated GDP in 20 of China’s 28 sectors, including consumer favourites from autos to home appliances. Weak revenues are in turn depressing earnings for consumer goods companies, which normally track GDP growth quite closely, but shrank in the first quarter. Imports also fell 8 per cent in April. The reasons things are not moving, the author says, is that since 2008 already China’s economic model has been based on government stimulus and rising debt. Now, further debt increases are becoming harder. The debt service burden of Chinese consumers has doubled in the past decade to 30 per cent of disposable income — a level three times higher than in the US. Clearly, therefore, it says, the China growth model has run out of steam.
Geopolitics
After the fall of Bakhmut, another escalation in the Ukraine War, with the US and Europe officially agreeing to train Ukrainians in the use of F-16 fighter jets, according to Politico. You probably don’t need EPM to tell you that this is a clear preparation for actual delivery of the jets at a later moment. What could be interesting to you is our view that this is not the result of recent discussions between the concerned parties. Back in June of 2022 the US already prepared $100 million for the training of Ukrainians in the use of US fighter jets. Thereafter, in February of 2023 the UK first offered to train Ukrainians in the use of western fighter jets, a move which was presented as a first step toward to the actual delivery of fighter jets to Ukraine. In other words, this escalation has been sometime in the making. As to how this is likely to eventually happen, Norway, Denmark and the Netherlands all have aircraft that could be donated to Ukraine once the three countries upgrade to the F-35. As you know, EPM steers clear of moral judgements in general, but in geopolitics in particular. Of course, morally, a country that is militarily invaded should be supported. The EPM role, however, is to look at how events affect the markets. With that in mind, we reiterate our fundamental view that the US-crafted narrative that “peace negotiations can only start once Russia is comprehensively defeated in Ukraine”, which Europe has blindly adopted, makes talks to stop the fighting, which is causing death and destruction on a massive scale, impossible; and naturally leads to growing involvement in the war by western powers. We see this as very, very dangerous for Ukraine, Russia, and Europe, as it greatly increases the chances of the current war turning into a regional conflict. Delivery of F-16s, for example, would almost certainly require support from ground personnel, which could easily be seen as active participation in the fighting, and thus construed by Russia as a justification to attack targets in Europe that are important to the F-16 supply chains. Such an escalation of the fighting very clearly is a major danger to the European interests in particular.
Apparently, we at EPM do not stand alone in our view that the western position on the Ukraine war is very dangerous to European and global well-being. According to Democracy Now, 15 former US officials, mostly of former military officers and national security officials, including Jack Matlock, Washington’s former ambassador to the Soviet Union; Ann Wright, a retired U.S. Army colonel and former diplomat; Matthew Hoh, a former Marine Corps officer and State Department official; and Lawrence Wilkerson, who served as Secretary of State Colin Powell’s Chief of Staff, have used a full page add in the New York Times to publish an open letter to call for peace rather than continued escalation of fighting. Its headline reads, “The U.S. Should Be a Force for Peace In the World”, and it says: “The Russia-Ukraine War has been in unmitigated disaster. Hundreds of thousands have been killed or wounded. Millions have been displaced. Environmental and economic destruction have been incalculable. Future devastation could be exponentially greater as nuclear powers creep ever closer toward open war. We deplore the violence, war crimes, indiscriminate missile strikes, terrorism, and other atrocities that are part of this war. The solution to this shocking violence is not more weapons or more war, with their guarantee of further death and destruction. As Americans and national security experts, we urge President Biden and Congress to use their full power to end the Russia-Ukraine War speedily through diplomacy, especially given the grave dangers of military escalation that could spiral out of control.”
Supporting this view that negotiations are what is needed, not more weapons, comes from Brazilian president Lula Da Silva. In a news conference before departing from Hiroshima, Lula criticized President Joe Biden’s rhetoric toward Russia, saying it wasn’t helping peace efforts, writes Bloomberg. The Brazilian leader insisted that he condemns Russia’s occupation of Ukraine, which he said has the right to defend its territory. But he didn’t rule out a solution to the war that includes territorial losses by Ukraine, saying neither sides had viable proposals to put an end to the conflict. “Ukraine’s proposal is capitulation by Russia, which isn’t going to accept it. Russia’s proposal is capitulation by Ukraine, which isn’t going to accept it,” he said.
Looking east, from Japan the leaders of the Group of Seven nations issued a communique on Saturday, a day ahead of schedule for unspecified reasons, writes Nikkei Asia. It was very much China focused. "Our policy approaches are not designed to harm China nor do we seek to thwart China's economic progress and development," the communique says. "A growing China that plays by international rules would be of global interest. At the same time, we recognize that economic resilience requires de-risking and diversifying." Regarding Taiwan, the communique says: "We reaffirm the importance of peace and stability across the Taiwan Strait as indispensable to security and prosperity in the international community." Nikkei Asia rightly notes that this statement means the G-7 considers Taiwan stability to be an issue of international concern rather than a Chinese domestic matter – and that is China’s fundamental issue with the matter, as in its view Taiwan is an internal Chinese issue!
China is not happy with the communique and China Vice Foreign Minister Sun Weidong has summoned the Japanese ambassador to register protests over "hype around China-related issues" at the G-7, writes Reuters.
Russia's war against Ukraine, the Sino-American rivalry, and the rise of new middle powers is spurring a profound reorganization of the international order that will leave Europe at a distinct disadvantage, argues Germany’s former foreign minister Joschka Fischer in Project Syndicate. The broader danger for the current world order is not the war in Ukraine, he says, but the deterioration of US-China relations. Some of the biggest losers in this confrontation are likely to be Japan and Europe. Chinese firms have built massive production capacities in the automobile industry – especially in electric vehicles (EVs) – and are now poised to outcompete the European and Japanese automakers that have long been globally dominant, Fischer believes. Making matters worse, he says, is the fact that America’s response to the Chinese competition is to pursue an industrial policy that will come at European and Japanese manufacturers’ expense. And he says, correctly in the view of EPM, that to thrive in a world dominated by large states with growing military budgets, Europe has no choice but to become a real power. To do this, Fischer says, Europe must take great pains to preserve its economic model during this reorganization of the global economy, manage high energy costs, the growing digital technology gap vis-à-vis the two superpowers, and an urgent need for increased defense spending. What Fischer missed out in his analysis, we at EPM believe, is that Europe must re-learn to think independently in geostrategy and geopolitics. As long as it follows the strategies and plans of others in this area, it will always be used by others for the interests of the others, and find its own interests relegated to a second order priority. Europe’s response to the Ukraine war, and its position vis-à-vis Taiwan, are in our EPM examples of Europe allowing itself to be used by others for the interests of others and at its own expense (e.g. energy insecurity leading to de-industrialization).
An opinion piece in South China Morning Post argues that the book “Thucydides’ Trap” by Harvard scholar Graham Allison is using the wrong historical event – the Peloponnesian War between Athens and Sparta – to analyse the current conflict between the US and China. Rather, it says, the clashes between Carthage and Rome would provide better insight. During the first Punic war, Carthage was essentially an older maritime power that controlled trade in the Mediterranean Sea, backed up by fertile lands in northern Africa, while Rome was a rising power expanding outward. The first Punic war began with Carthage being the dominant naval power while Rome had the stronger land army. Carthage relied more on hiring mercenaries and less on its own citizens to fight in wars. Rome, on the other hand, had mostly citizen-soldiers whose fortunes depended largely on victory and conquest. Once Carthage began to lose its naval superiority, there was a period of attrition in which both sides fought indecisively with severe consequences for both. In 241 BC, Rome won the naval Battle of Aegates. Carthage ceded control of Sicily to Rome and paid terrible reparations. After its loss, Carthage had to fight off a mercenary uprising led by discontented unpaid mercenaries who were joined by a rebellion of other Africans in Carthage’s oppressed territories.
Energy Transition & Technology News
The Wall Street Journal reports that ExxonMobil has bought 120,000 acres in southern Arkansas from an exploration company called Galvanic Energy, for some $100 million. What’s the big deal you wonder? Well, the region is not known for its oil or gas potential. Rather, it is believed to contain vast lithium reserves, in the form of “smackover brine” which is a rich broth of saltwater and minerals. ExxonMobil is said to want to drill for the brine in which the lithium can be found, bring it up, and process it, using processes not too dissimilar from conventional oil and gas.
China’s PV industry has undergone an extraordinary journey over the past 20 years, writes PV Magazine. The country is now the world’s biggest solar market and exporter of most of the world’s PV wafers, cells, and modules. It is also set to become the first country to install 100 GW(AC) of solar in a year. In other words, when it comes to solar, it truly is world leading and THE critical element of the global supply chain. The article explores how it got to this point. It began with Zhengrong Shi’s foundation of Suntech Power in 2000, with backing from the Wuxi municipal government. In December 2005, Suntech became the first private Chinese company to list on the New York Stock Exchange. Suntech contemporaries LDK – founded in Jiangxi – and Hebei-based Yingli also went public in the United States, and the trio became the most important companies in the Chinese industry for a time. These Chinese businesses, with their manufacturing cost advantage and supportive government policy, established an international advantage as demand for PV boomed in Europe and the US. They expanded upstream in response to silicon supply constraints, signing long-term supply deals and establishing their own polysilicon operations. The global financial crisis of 2008 severely dampened demand for solar, after which the US and European lawmakers implemented anti-dumping and countervailing duties on Chinese solar products in 2011 and 2012. Beijing responded by looking inward and ramping up the solar generation capacity targets. This enabled the companies to focus on growing scale and bringing down costs, which got the industry to where it is today.
Julio Friedmann, chief scientist of Carbon Direct and an advisor on energy policy to the Biden White House, has a blog post about the economics of Direct Air Capture, and what this means for the energy system of tomorrow. Today, commercial prices for DACCS exceed $500/ton removed, reflecting high capital and operating costs, he says. If these costs were to go down to $300/ton, the result would likely be a reduction in global energy usage by 2050, because the world then use less high-energy intensity products such as green hydrogen or e-fuels, preferring to just “vacuum up” GHG rather than avoiding them. This scenario would reduce the overall bill of reaching Net Zero by trillions, Friedmann finds, supporting his view that DAC is where the innovation action needs to be.
Over at Open Mind, an article discussing the pros and cons of concentrated solar. On the pros-side, high energy efficiency of 30 – 40%, a capacity to short-term store the energy produced (10 to 15 hours). On the cons-side, high costs, and a need for high levels of solar irradiance which limits its potential use to select countries.
Climate Politics
The Electrification of Transport
Cheap Chinese EVs are coming to the US, says Business Insider. And they are likely to cause disruption at a scale similar to the entry of the Japanese car manufacturers in the 1970s. China's EV industry has exploded in recent years. In 2022, US EV sales hit a new high of 800,000, while Chinese buyers snapped up some 5 million electric passenger vehicles. After years unchallenged, Tesla is about to lose its crown as the world's largest EV maker to a Chinese company, BYD. These Chinese brands are now unmatched in affordability on their home turf and in Europe. They are likely to test the waters in the US with low-volume launches and study the market before diving in fully. Of the dozens of brands that may want a slice of the pie, only a few would be able to sell in the US at any significant volume
The Global Energy Crisis
Other
The MIT Technology Review looks at the Science Based Targets initiative, or SBTi. helps businesses develop a timetable for action to shrink their climate footprint through some combination of cutting greenhouse-gas pollution and removing carbon dioxide from the atmosphere – for a fee. It has been very successful, as evidence by the fact that it has now stamped its approval on the emissions reduction timelines of more than 2,600 companies, including Nestlé, PepsiCo, and Apple. It’s working to develop climate targets with more than 2,300 more, and hopes to help set them for some 10,000 businesses by 2025. Observers praise many of the organization’s standards, and particularly its refusal to use carbon offsets to meet targets. But its rising influence has also attracted scrutiny and raised questions about its outsize role. The fact that a single organization is setting the standards for many of the world’s largest companies makes it essential for those climate targets to be trustworthy. A number of researchers now question whether SBTi’s corporate guidelines are adequately aggressive, equitable, and clear. Critics say SBTi is giving companies too much latitude in how they set their targets; that it is allowing them to rely on certain dubious tools to address emissions; and that it is holding emerging companies in poor nations to the same standards as huge historic polluters.