Energy, Politics & Money - 23 February 2023
Independent, objective, and politically neutral analysis of global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, we continue our closer look at China’s entry into the diplomatic games around the war in Ukraine. The country’s main diplomat visited Moscow yesterday, where took a decisively independent stance, uninfluenced by US pressures. As to what China is trying to achieve, apparently it is on the one hand preparing for a possible future where it too is designated a “state sponsor of terrorism” by the US and its allies (and we explain why, contrary to what most analysts will tell you, we at EPM believe this is a real possibility), for which China has to build its own network of allied states; and on the other hand it believes it can potentially get the US to offer concessions on its anti-China trade policies, if China secures for itself a position of influence in the Russia – Ukraine conflict.
Furthermore, we look at:
Morgan Stanley’s updated outlook for oil in 2023, which features an average oil price decline to $90-100 a barrel, from $100-110 previously
The most likely trajectory of US interest rates – a lower 0.25% increase as the next Fed decision, followed by “higher for longer”
India’s continued neutral position in the Ukraine war, which is supported by a majority of its population, who see the war as being less about protecting protection of Ukraine’s territorial integrity or its democracy, and more about other ulterior western motives
Shell’s flip-flop on electricity - it is now reported to be looking at selling its energy retail businesses in the UK, the Netherlands and Germany, after saying earlier it wanted to become a major player in this area
Michael Liebrich’s view on the future of hydrogen, which he believes is currently greatly overestimated – a perspective we at EPM, as you know, fully agree with
China’s technological development in the fields of nuclear fusion and fission, where it is racing ahead of global competition
The IEA accusation that the oil and gas industry is not doing enough to tackle methane emissions, which could be stopped relatively easily with existing, low-cost technologies
Mercedes-Benz’s new strategy in software technology
How the younger generations are falling out of love with the car
General Energy News
Morgan Stanley updated its 2023 market outlook for oil. According to a Reuters report, the bank raised its outlook for oil demand, from an annual demand increase of 1.4 million barrels per day to 1.9 million barrels per day. This is primarily due to the activities Morgan Stanley has observed in the Chinese economy. On the supply side, the bank expects Russian supply to be stronger than originally anticipated. However, it forecasts a decline of 0.4 million barrels per day instead of an earlier expectation for a decline of 1.0 million barrels per day. As a result of which it lowered its second half 2023 outlook for oil to $90-100 a barrel, from $100-110 previously.
Russia plans to cut oil exports from its western ports by up to 25% in March versus February, three sources in the Russian oil market said to Reuters. “The export cuts appear to be deeper than the planned production cuts. It might help bump up the price for Russian oil”, one of the sources said. But there are no plans to cut exports from the Pacific.
Macroeconomics
At the US Fed’s last policy meeting, nearly all policymakers rallied behind a decision to further slow the pace of interest rate hikes, but also indicated that curbing unacceptably high inflation would be the “key factor” in future decisions about the interest rate, writes Reuters. As a result, the market expectation is now for a 0.25% raise at the next Fed meeting.
Geopolitics
During Wang Yi’s, China’s top diplomat, trip to Russia he clearly indicated his country is independently maneuvering the Russia-Ukraine war, uninfluenced by US pressures. According to Nikkei Asia, Wang said the relationship between China and Russia was not directed against any third party, but equally would “not succumb to pressure from third parties”, which Nikkei calls “a clear jab at the United States”.
The Russian news agency TASS, meanwhile, quoted Wang as saying that:
(China) is ready to join forces with the Russian side, in accordance with the high-level agreements, to decisively stand up for national interests and virtues, and promote mutually beneficial cooperation in all areas.
Russian president Vladimir Putin is now waiting for his Chinese counterpart Xi Jinping to visit Russia, writes Bloomberg. The two nations are aligned in pushing against the US and its allies and have pledged to:
jointly practice true multilateralism, oppose all forms of unilateral bullying, and promote democracy in international relations and a multi-polar world.
According to the Wall Street Journal, Xi is indeed planning a visit to Russia, as part of China’s new, pro-active stance in the Russia–Ukraine war. The visit could be in April or in early May, when Russia celebrates its World War Two victory over Germany.
Nikkei Asia has a report that provides more insight into China’s thinking around the Ukraine War, and the reasons for its stepping up to the diplomatic plate over the past week. It says, firstly, that China believes it is at risk of being designated a “state sponsor of terrorism” by the United States. The European Parliament has already adopted a resolution by a majority vote labeling Russia a state sponsor of terrorism. Therefore, if China were to take the side of Russia, it could be targeted in a similar fashion.
EPM wants to stress that sanctions that would result from such a designation would devastate the global economy. Most analysts will tell you, therefore, such a US move is highly unlikely because it would be economically painful for the US itself. Our EPM response to that is, however, that geopolitics trump economics. We look at the evidence and conclude that wars are economically devastating for all parties involved in the conflict. Yet, throughout history, countries engaged or used war whenever they felt their geostrategic interests were under threat (and they saw no other pathway or means for protecting these interests). Therefore, a complete break between the US-led western block and China, should be considered as a possible scenario, even though it would be unimaginably painful for all parties concerned.
Secondly, the report provides information as to why China recently upped its engagement with Europe, the US, and Russia over the Ukraine War. It notes that China’s objective is to get the US to compromise on its sanctions policy, in return for China compromising on its position vis-à-vis Russia in Ukraine. The most important concession China wants from the US, is in regards to the US’s efforts to ban the export of semiconductor technology and equipment to China.
Thirdly, the report mentions China has approached US allies in Europe and Asia, such as Germany and Japan, to warn them US policies regarding Russia and China do not serve their interests and that they “should grasp the situation and make an independent choice”.
Some of the countries “on the fence” regarding the conflict appear susceptible to this messaging, that their interests are not aligned with those of the US. For example, Reuters reports that India doesn’t want the G20 to discuss further sanctions on Russia. India will lead the G20 this year, taking over from Indonesia, and is of the opinion that the existing sanctions on Russia have had a negative impact on the world.
India is supported in this stance by a majority of its population, according to the Financial Times. It says a recent opinion poll found that Russia is seen either as an “ally” or a “partner” by 80 percent of Indians, 79 percent of people in China, and 69 percent of Turks. Moreover, about three-quarters of respondents in each of these countries believe that Russia is either stronger, or at least as strong, as they perceived it to be before the war. And while a majority of Americans and Europeans want Ukraine to win even if it means a longer war and economic hardship for themselves, most Chinese, Indians and Turks who expressed a view said they would prefer the war to stop as soon as possible – even if that means Ukraine giving up part of its territory – as they see western support for Kyiv motivated largely for reasons other than the protection of Ukraine’s territorial integrity or its democracy.
Energy Transition & Technology News
Shell is working with Lazard to prepare for a sale of its home energy retail businesses in the UK, the Netherlands and Germany, writes Bloomberg. This marks a significant reversal for Shell, which had earlier said it wanted to become a major household power supplier, as Europe’s economy shifts increasingly to electricity and moves to rapidly cut carbon emissions.
According to Hydrogen Insight, Michael Liebrich is of the opinion the world is currently in “hydrogen mania”, and he expects it will be another seven years before the world realizes that clean hydrogen should only be used to replace the existing 94 million tonnes of annual fossil-fuel hydrogen supply and in a handful of other sectors. He says:
We will need clean hydrogen. But fantasies of a hydrogen economy, hydrogen society and globally traded hydrogen market need to be abandoned. There will be a global market in ammonia, but mainly for fertilizers, chemicals, shipping fuel and some [energy] storage.
As to why it will take seven years for this bubble to burst, Liebrich is quoted as saying,
There’s an element of cult deprogramming required — it takes time. Once people have become convinced of something, they don’t suddenly become unconvinced the next day. It just takes time
He explains, adding that some people “in the cult will never relinquish those beliefs”.
Just for clarity, EPM shares this perspective on hydrogen. We urge investors in hydrogen to be very clear on the use-case they are targeting with their product, as many of the new uses that are being touted by consultants and we believe they are unlikely to actually materialize at scale and economically.
On the subject of hyrdogen use cases, ExxonMobil plans to export its blue hydrogen in the form of ammonia to Asia, writes Nikkei Asia. Dan Amman, head of the company’s low carbon business, said “We think hydrogen is going to play a critical role in decarbonizing heavy industry.” SK Materials from South Korea, part of the SK Group conglomerate, has signed a basic agreement for the purchase of blue ammonia from ExxonMobil. The plan is to start shipping ammonia by 2027, latest 2028, for blending with coal for electricity generation – which we at EPM do not expect to be a low cost decarbonization route.
China has raced ahead of the pack in filing patents in nuclear fusion technology, writes Nikkei Asia. Second place is the US, followed by the UK and Japan. China is also ranked first in the number of patents, and companies and research institutions that had filed patents in the nuclear fusion field.
Climate Politics
The energy industry is not making sufficient efforts to reduce its methane emissions, writes CNBC on the basis of a new report from the International Energy Agency. The energy sector is the second-largest source of human-caused methane, behind only agriculture, and was responsible for 40% of human-created methane emissions in 2022, the IEA says.
But much of the methane emitted by the energy industry could be stopped with existing technologies, “highlighting a lack of industry action on an issue that is often very cheap to address,” the report said.
The Electrification of Transport
Mercedes-Benz has teamed up with Google on navigation, and will offer “super computer-like performance” in every car with automated driving sensors as it seeks to compete with Tesla and Chinese newcomers, writes Reuters. At the same time, self-driving sensor maker Luminar Technologies has struck a multi-billion-dollar deal with the carmaker to integrate its sensors across a broad range of its vehicles. The strategy behind these moves is said to be an effort by Mercedes to bring core software under its direct control, and to work with partners for all other elements of the future car’s technology.
Other
Few technologies defined the 20th century more than the car, and on the surface, the love affair with the personal automobile continues unabated into this century. But there are hints that this is changing, writes The Economist. A growing minority of young people either ignore or actively oppose it. That, in turn, is starting to create more support for anti-car policies being passed in cities around the world.