Energy, Politics & Money - 23 January 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, EPM takes a closer look at EU’s ban on the import of Russian refined products is scheduled to come into place on February 5th. Russian diesel is critical to keep the supply side of Europe’s economy going. Seeing the risk of the coming ban, therefore, the EU and US are working to introduce price caps on Russian refined petroleum products, similar to what they did with Russian crude oil, to ensure continued flow of Russian diesel.
While that seems like a logical thing to do, since the Russian crude price cap has not caused any disruption so far, at EPM we urge caution.
The overall structure of the crude oil market has kept the price of Russian crude below the price cap, and it remains to be seen what will the Russian response will be if an economic recovery in China raises the overall crude price level, pushing the price for Russian crude above the cap.
Furthermore, we look at:
The economic outlook of Nouriel Roubini, which is closely aligned with that of EPM
Thoughts on the speed at which China’s economy could return to pre-Covid growth rates
Analysis of why China’s population growth is a structural problem for its society, economics and politics
Innovation in the field of fertilizers, where the major players are looking at microbes that would reduce the need for chemical fertilization
The role played by the oil industry at the World Economic Forum, and what this signals
How Germany has been able to keep the lights on this winter, to see if it will be able to do so throughout 2023
General Energy News
As the EU’s ban on the import of Russian refined products is scheduled to come into place on February 5th, Bloomberg asks the valid question, “What Europe Risks With Wider Sanctions on Russian Oil?”.
Seeing the risk, the West is working to structure price caps on Russian refined petroleum products, to ensure continued flow of Russian diesel, writes Reuters.
At EPM we note that Russian diesel is critical to keep the supply side of Europe’s economy going. An earlier Bloomberg report noted noting about half of EU and UK diesel imports were from Russia in 2022. Seeing a disruption coming that would significantly push up the price of diesel, it seems a copy of the price cap for Russian crude oil is in the making, i.e. more complex market interference to deal with the fallout of other market interference (sanctions). And, before it has become apparent how this has played out in the crude oil market, where Russia is yet to show a real reaction, because its crude sales are at price levels that are not affected by the price cap. The optimist will say that this is evidence the exact mechanism should be introduced for Russian refined products. The pessimist – and at EPM we do focus on warning you of the potential downsides where you can lose a lot of money if you don’t pay attention, and make a lot if you do – would say all these market interventions is playing with fire. They seem to work well when the global macroeconomic environment keeps demand well supplied. But if something where to happen that causes physical tension, such as an economic recovery in China, we could well find ourselves surprised by unexpected outcomes.
S&P Global has an interactive overview of the world’s largest upstream oil investments, which are set to provide almost 6.5 million barrels per day of new peak capacity by 2030.
Macroeconomics
Over at Project Syndicate, Nouriel Roubini sets out – again – why he is of the opinion the world is facing “interconnected megathreats”. Where once interest rates were too low, he says, they have now been rising fast, driving up borrowing costs and creating the risk of cascading debt crises. The age of hyper-globalization, free trade, offshoring, and just-in-time supply chains has yielded to a new era of deglobalization, protectionism, reshoring (or “friend-shoring”), secure trade, and “just-in-case” supply-chain redundancies. New geopolitical threats are increasing the risk of both cold and hot wars and further balkanizing the global economy. The effects of climate change are becoming more severe, and at a much faster pace than many had anticipated. Pandemics, too, are likely to become more frequent, virulent, and costly. Advances in artificial intelligence, machine learning, robotics, and automation are threatening to produce more inequality, permanent technological unemployment, and deadlier weapons with which to prosecute unconventional wars. All of these problems are fueling a backlash against democratic capitalism and empowering populist, authoritarian, and militaristic extremists from both the right and the left. The world is therefore facing not only the worst of the 1970s (repeated negative aggregate supply shocks), but also the worst of the 2007-08 period (dangerously high debt ratios) and the worst of the 1930s, he says. While he notes widespread agreement on this, at the WEF in Davos he does not see that translating into a sense of urgency to deal with this new reality. We are sleepwalking into the abyss, in other words.
Bloomberg reports on the impact higher interest rates are having on real estate globally. Many real estate markets are almost frozen with some lenders telling borrowers to sell assets or risk foreclosure amid demands for additional capital from landlords. Distress levels in European real estate are at the highest in a decade, and almost $175 billion of real estate credit is distressed globally according to data compiled by Bloomberg. They concluded that this will inevitably impact spending in the real economy.
An opinion piece in Nikkei Asia throws some cold water on the idea that China’s economy will rapidly return to pre-Covid growth levels. It says, small and midsize Chinese businesses, which dominate employment and economic activity were devastated by dynamic zero COVID. With hundreds of thousands of them going out of business, or at least severely impacted, their owners and former employees will not be going on any shopping sprees anytime soon. But, it says, China’s fundamentals remain strong -- economies of scale at home, subsidies from the government and technological progress will give Chinese companies an edge in markets like Southeast Asia and Latin America.
Meanwhile, an analysis at The Conversation looks at why China’s shrinking population is a big deal. It looks at the social, economic and political costs of having an aging, smaller society. In society, since most Chinese families have only a single child, due to the one-child policy in place for three and a half decades, those children will need to fulfill obligations to their career, provide for their own children and support their elderly parents simultaneously. On the economic side of the equation, a shrinking population means there will be fewer workers able to feed the economy and spur further economic growth on one side of the ledger; on the other, a growing post-work population will need potentially costly support. On the political side, the social and economic challenges could result in a crisis for the Chinese Communist Party, as its legitimacy is tied closely to economic growth and general wellbeing of the populace.
Energy Transition & Technology News
The importance of synthetic fertilizers for the global food system of today is hard to overestimate. But, this dependency comes at at a cost to the environment, notes Bloomberg, as fertilizer production relies on natural gas or coal, accounting for just over 2% of the world’s GHG emissions. In addition, being dependent on commodities including nitrogen, phosphorous, potassium and natural gas, fertilizer costs can also fluctuate wildly and unpredictably, leaving farmers exposed. Agribusiness heavyweights including Bayer, Corteva and Archer-Daniels-Midland are therefore turning to microbes, recycled organic waste and other lower-emission and chemical-free substitutes. As to microbes, these can help plants access naturally occurring nutrients from their environment. Trials of microbe usage are occurring globally, with promising results.
Bloomberg also reports on what it calls “a rash of recent wind turbine malfunctions across the US and Europe, ranging from failures of key components to full collapses”. Some industry veterans say they’re happening more often, even if the events are occurring at only a small fraction of installed machines, with one quoted as saying “We’re seeing these failures happening in a shorter time frame on the newer turbines, and that’s quite concerning”. The rapid growth in both the size of the typical wind turbine, and the overall wind energy industry, is likely to have left too little time and attention for a focus on quality throughout the supply chain of the major wind turbine manufacturers, something these companies say they are now addressing.
Climate Politics
At COP26 in Scotland, the leaders of the world’s oil and gas companies were persona. At COP27 in Egypt, they were invited and established a prominent presence on the side of the actual conference proceedings. At the most recent World Economic Forum in Switzerland, they were front-and-center of the energy transition debate, writes Reuters. Their message was that the current global energy crisis, resulting from the sanctions on Russian sources of energy, indicate that investment in fossil fuels remains needed to supply the world with the energy it needs. Environmentalists are not convinced, however, as they argue these investments take years to materialize, while investments in renewable source can provide energy supplies much earlier. The EPM view is that “not all sources of energy are created equal”, and thus that a debate at the level of “energy” is too macro. There are sectors of energy that for which renewables are a suitable solution (basically any sector of energy demand that can be fed electrons) and hence in these areas an “environmentally focused” approach to resolving energy shortages make sense. The sectors where liquids are required, however, would not benefit from additional renewables. As such we repeat our view – or, mantra, by now… – that there is no “silver bullet” for solving the climate change, or the energy crisis. This requires a sectoral review of supply and demand.
The Global Energy Crisis
Bloomberg analyses how Germany has been able to keep the lights on. On the supply side, it has turned to additional pipeline gas from Norway and the Netherlands, as well as increased usage of coal. Together with lower demand, due to the mild weather and an effort to save on usage, this has prevented the worst-case scenario from materializing – so far. Success in future years will depend on some fragile pillars, Bloomberg notes, not in the least the limited supply of LNG globally, more of which is likely to head to China in 2023.
Other
An opinion piece in Nikkei Asia highlights that the world’s oceans absorb over 90% of the heat generated by global warming, produce 50% to 80% of the world's oxygen, and soak up roughly 25% of global carbon dioxide emissions. However, due to the amount of the CO2 in the atmosphere, the oceans have become significantly more acidic, up to 30% more by some estimates. As the sea absorbs CO2 from the atmosphere, it dissolves to form carbonic acid, increasing oceanic acidity levels. This is potentially catastrophic for marine life – meaning the ability of the oceans to continue to perform the above-mentioned functions – and the billions of people whose livelihoods depend on it.