Energy, Politics & Money - 23 November 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in these chaotic times.
In this roundup, we look at the efforts by Saudi Arabia to increase its market share in Europe. At EPM we see this as a natural consequence of the Russian sanctions policy that will push Russian crude into China and India – at discounted prices – meaning that it will worsens competition for Middle Eastern crude in those areas. Naturally, then, Middle Eastern crude will seek buyers in regions where Russian crude has been kicked out, i.e. Europe.
Furthermore, we look at:
The EU’s decision to water down its next round of sanctions on Russian crude oil
Mohammed El Erian’s view that the current global economic storm is not an “outgrowth of the normal business cycle”, but rather the result of the world “experiencing major structural and secular changes that will outlast the current business cycle”
A review of proceedings at the Trilateral Commission, which appears to indicate tensions between the US and its Asian partners, as Asia fears to become the victim of the US – China conflict; as well as tensions between the Asian countries, as some – India – are more explicit in their support for the US position
The challenges faced by Europe’s wind turbine manufacturer, which are being battered by higher production cost, causing loses on pre-sold turbines, while Chinese competitors stand ready to jump into any gap in the market that might open up as a result
The Trafigura assessment that if the weather stays “normal” over winter, and Russia does not further reduce natural gas supplies, Europe may be able to get through this winter and the next
New pressure from Russia on Europe, as Gazprom threatens to reduce natural gas flows through Ukraine
The European Union proposal for a gas price cap for the bloc at 275 euros ($282) per megawatt hour, which we at EPM cannot see supporting energy security nor market stability.
General Energy News
Saudi Arabia is positioning itself to supply more oil to Europe as traditional buyers of Russian barrels look to diversify ahead of looming sanctions in early December and analysis suggests the trend could become more pronounced in 2023, writes S&P Global. At EPM we see this as a natural consequence of the sanctions policy. It is pushing Russian crude into China and India, at discounted prices, meaning it worsens competition in those areas for Middle Eastern crude. Naturally, then, these crudes will seek a home in the regions where Russian crude has been kicked out, i.e. Europe.
The European Union watered down its latest sanctions proposal for a price cap on Russia’s oil exports by delaying its full implementation and softening key shipping provisions, writes Bloomberg. The bloc proposed adding a 45-day transition to the introduction of the cap. The proposed grace period would apply to oil loaded before December 5 – the date oil sanctions are due to kick in – and unloaded by January 19, aligning the EU to a clause previously announced by the US and the UK. The draft legislation also softened an earlier provision that would have indefinitely barred vessels carrying Russian crude purchased above the threshold from accessing European services for shipments of all oil regardless of origin. The EU is also proposing a 90-day transition in the event of any future changes to the level of the price cap.
A “technical analysis” on Forbes argues oil is likely to extend its decline from recent weeks into November and December.
Macro-Economics
In a Foreign Affairs essay Mohammed El Erian argues the current global economic storm is not, as some argue, an “outgrowth of the normal business cycle”. But rather, he says, the world is “experiencing major structural and secular changes that will outlast the current business cycle”. He believes the global economy is now characterized by “a shift from insufficient demand to insufficient supply as a major multi-year drag on growth, the end of boundless liquidity from central banks, and the increasing fragility of financial markets”. As you know, this is EPM’s view: the global economy is not just in a recession, it is being fundamentally rewired by a number of macro trends, primarily the US – China geostrategic conflict causing regionalization, a new normal in monetary policy which ends free money and will cause the demise of many “zombie companies” that have been kept afloat by two decades of loose monetary policy, and demographics, the end to population growth in the world’s major centers of demand.
New Zealand’s central bank on Wednesday delivered its biggest interest rate hike, raising the official cash rate (OCR) by 75 basis points to 4.25%, its highest since January 2009, and outlined a more hawkish monetary tightening path in coming months as it tries to rein in stubbornly high inflation, writes Nikkei Asia.
Geopolitics
Nikkei Asia discusses this year’s meeting of the Trilateral Commission in Tokyo. The origins of The Trilateral Commission go back to an effort in 1972 by David Rockefeller, the head of New York’s Chase Manhattan Bank, to include Japan in the Bilderberg Group, an annual gathering of intellectuals to foster dialogue between Europe and North America and to prevent another world war. When rejected by the Dutch royal family, which chaired the Bilderberg Group, Rockefeller created a new gathering with Japan as a member. The objective of the Commission was to steer the US-Japan-Europe security partnership. Its deliberations, and the influence it wields, has been the subject of much speculation, in no small part because membership in the Commission and its proceedings were kept secret.
Now, in the age of populism, the proceedings of the Commission were opened to reporters from Nikkei Asia, who were permitted to attend the meeting on November 19 and 20, on the condition that the discussants would not be quoted by name. Each new candidate for Commission membership is carefully scrutinized before being allowed entry. As a rule, members who take up positions in their national governments – which is uncannily common – give up their Trilateral Commission membership while in public service. Those include US Secretary of State Antony Blinken, Jake Sullivan, the US national security adviser, Danish Prime Minister Mette Frederiksen and Indian External Affairs Minister Subrahmanyam Jaishankar.
A new sentiment has now emerged from the Asia Pacific Group of the Commission, writes Nikkei: Without input from Asia, the US may lead the world into a dangerous confrontation. In Washington, the concept of engaging China is dead. But the idea of engaging China is not dead in the eyes of the Trilateral Commission, especially in the Asia Pacific Group, which included members from Japan, South Korea, India, Singapore, the Philippines and Vietnam. Asia’s elites are nervous that the world is heading in the wrong direction, fueled by the intensifying competition between the US and China and the decoupling that awaits. And the problem, in the view of many of the participants, is America. During the two-day gathering, however, it became clear that one participant strongly supports the US position: India.
Energy Transition & Technology News
In the midst of the energy transition, Europe’s wind turbine makers, the crown jewels of the region’s green energy industry and a source of manufacturing expertise, are reporting losses and laying off workers, writes the New York Times. Several problems are battering the industry, including rising costs for materials and shipping, as well as logistics snags, some of them a legacy of the pandemic. As a result, prices agreed on earlier for turbines, which cost millions of dollars apiece and can add up to hundreds of billions for large offshore wind farms, can result in huge losses for the manufacturers when they are delivered. At the same time, a race to create bigger, more powerful turbines has meant that manufacturers are spending hundreds of millions of dollars on new models but not selling enough machines to recover the costs. And alarms are beginning to sound about growing competition from China, where domestic turbine makers that have spent years catering to the Chinese market are beginning to sell their machines overseas. The EPM perspective is that if Europe wants energy security, it must ensure a “domestic supply chain”. This means it must support wind turbine manufacturers dealing with inflation, to prevent this external shock from causing an implosion of the industry which Chinese manufacturers can then jump into. But, we admit, this is easier set than done, for if not managed well, this can easily end up in the domestic supply chain becoming reliant on state support, and losing its competitive edge as a result.
On Monday, Robert Habeck, the German Economy Minister, said that Germany is examining the introduction of state guarantees for renewable energy investments according to Reuters. This is designed to support Berlin’s attempt to become more energy independent by scaling Germany’s renewables capacity. EPM believe that this is a wise move. However, we add that the US is driving their transition through subsidies and if Europe wants investors to put their money in the economy of the continent, Governments will have to match these subsidies.
The Global Energy Crisis
Some good news is an analysis of Europe’s gas situation by Trafigura, reported on by Bloomberg. Mild weather across Europe in recent weeks is setting the region up to avoid a natural gas shortage for winter this year and next, it says. Europe’s gas inventories are likely to drain by roughly two-thirds this winter, provided there’s regular weather and Russian flows continue through Ukraine. That means the region will be able to survive the upcoming winter period, and could have enough of a fuel buffer to help avoid a crunch next year too.
However, Russia’s Gazprom says it may reduce supplies of natural gas through Ukraine this month and has accused Kyiv of taking gas meant for Moldova writes Nikkei Asia. Gazprom warns it may restrict gas flows through Ukraine from November 28.
Meanwhile, the European Union executive on Tuesday proposed a gas price cap for the bloc at 275 euros ($282) per megawatt hour for month-ahead derivatives on the Dutch exchange that serve as Europe's benchmark, writes Reuters. Diplomats, speaking on condition of anonymity, said the proposed ceiling was likely to disappoint the majority of EU states that have demanded a cap for months, and fail to assuage concerns of a small but powerful camp of member countries, led by Germany, opposed to the intervention. At EPM we reiterate that we don’t see how this could practically work - who would sell to Europe under a price cap system? If the market price goes above the gap, as Europe can cap all it wants, but this indicates there is demand for the product at higher prices somewhere in the system that sellers will try to meet. And, how do you settle positions on the financial markets when the price cap sets in? If the market price goes above the cap, do you then use the cap to settle or the market price? Who will intervene to ensure that sellers are compensated for selling below market prices? And who will compensate financial market participants if the cap causes them financial loss? According to the Financial Times, many in Brussels consider the plan a “joke”.