Energy, Politics & Money - 23 March 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
In this roundup, EPM takes a closer look at:
The Fed’s decision to raise rates by 0.25%
The current reality that biofuels compete with food and animal feed for feedstock, and what this means for Asia’s aggressive plans to scale up biofuels production
Europe’s desperate (and unrealistic) attempt to become less dependent on China for its energy transition
The World Bank proposal to the IMO to accept a carbon levy on ships
The new paper in the Harvard Environmental Law Review which argues that oil and gas companies should be brought to court on the accusation of homicide for their role in the climate debate
General Energy News
Crude Prices
Oil prices steadied on Thursday, having hit their lowest since late 2021 earlier this week, as strong US jobs data countered bearish signals from Fed Chair Jerome Powell and swelling US crude stockpiles, writes Reuters. Brent crude futures were up 1 cent, or 0.01%, at $76.70 per barrel, while WTI rose 4 cents, or 0.1%, to $70.94, making good on some deeper losses earlier in the session.
Oil prices are currently being moved less by supply and demand fundamentals and more by concerns that a banking crisis could spill over into the physical economy, notes an opinion piece on Forbes, which we at EPM believe is important to remember in the current situation.
Macroeconomics
Interest Rates
As we at EPM predicted, the US Federal Reserve on Wednesday elected to raise interest rates by 0.25%, as it sought to balance the risk of rampant inflation with the threat of instability in the banking system.
The Bank of England followed the Fed’s example, raising interest rates by the same 0.25%. Reuters reports that it expects British inflation to cool faster than before despite a surprise jump in price growth last month.
Federal Reserve Chair Jerome Powell also discussed the sharp reversal of the central bank’s effort to shrink the size of its balance sheet in the wake of the collapse of Silicon Valley Bank, Reuters reports. Last week, a surge of borrowing by banks, most notably via a record $153 billion in lending via the discount window, caused the Fed’s overall stockpile of cash and bonds to leap from $8.4 trillion on March 8 to $8.7 trillion, offsetting most of the quantitative of the previous 6 months. Powell said:
The balance sheet expansion is really temporary lending to banks … it’s not intended to directly alter the stance of monetary policy.
The Banking System Blows Hot Air
Citigroup CEO Jane Fraser on Wednesday expressed confidence in US banks after a series of closures rattled investors and fueled turmoil in global financial markets. According to Reuters she said
This is not a credit crisis. This is a situation where it's a few banks that have some problems, and it's better to make sure that we nip that in the bud
EPM would just like to highlight that statements of confidence as these are absolutely worthless as indicators of what is really going on or might happen next. The long list of such statement right before a collapse is sufficient evidence – the most recent one being Powell’s admission that top Fed officials were stumped at the sudden collapse of Silicon Valley Bank earlier this month. So look elsewhere for the analysis you need to steer your portfolio.
Geopolitics
Computer Chips - the West vs. China
The US and its allies will still have the most advanced chip technology in five years’ time, but should remain cautious about China’s impact on the market for less-advanced semiconductors, said “Chip War” author Chris Miller in an interview with Nikkei Asia. Miller, an associate professor of international history at Tufts University said:
If you ask me who’s going to have access to the most advanced technology in five years’ time, the US or China, I would say the US is going to produce the advanced technology in partnership with the Netherlands, Japan and Taiwan.
He notes China already has the production technologies and capacity to turn out large amounts of less advanced chips, meaning it will be important to monitor Beijing’s industrial policy for the sector and how it might affect the global industry. Referring to China's policy of heavily subsidizing domestic panel makers and disrupting global prices.
One key question is what is the impact of China’s investments on lagging-edge [chips] to the rest of the world? One of the scenarios is, this turns into a new version of solar panels. That's a scenario we should be cognizant of, and it poses really interesting policy problems for Taiwan, Japan, the US and Europe.
Energy Transition & Technology News
E-Fuels
Reuters has a backgrounder on the e-fuels we at EPM discussed yesterday. These fuels are made by synthesizing captured CO2 emissions with hydrogen produced using renewable or CO2-free electricity. Manufacturing e-fuels is very expensive and energy-intensive, but they can be a drop-in replacement for conventional fuels.
ADNOC and Geo-thermal
The UAE’s ADNOC Drilling has signed a five-year memorandum of understanding (MoU) with fellow UAE government owned company Masdar to explore geothermal opportunities around the world, writes Energy Voice. The drilling company will provide its services as a technical expert and advisor to help Masdar deploy geothermal energy.
Climate Politics
Europe and Solar power
The EU wants to make solar power its single biggest source of energy by 2030. That would mean almost tripling its solar power generation capacity over the next seven years. Yet, writes the Financial Times, more than three-quarters of the EU’s solar panel imports in 2021 “were from one single country”.
The commission’s response has been to introduce a Net Zero Industry Act designed to boost the manufacture of “strategic” technologies, including solar and other renewable energy infrastructure, on home turf. The law, proposed last week, states that the EU should have enough clean energy manufacturing capacity to meet at least 40 per cent of its generation needs. But the continent produces less than half of that at present, and there are already warnings that the proposals are unrealistic.
One of Europe’s main bottlenecks in the supply chain is the production of the silicon ingots and wafers that are used in the manufacture of solar cells. Two such production plants remain in Norway, run by Norsun and Norwegian Crystal. So long as their output remains at about 1GW or less each year there is little incentive for their upstream polysilicon suppliers such as Germany’s Wacker Chemie to expand their output. Wacker, the only European polysilicon producer of scale, already concentrates more of its production to support the semiconductor industry.
But not only do Chinese companies dominate world polysilicon production, the country has also become a world leader in the technology that turns the raw material into ingots and wafers. An industry executive said:
If we really want to be successful in re-establishing the value chain in Europe, we need China . . . Chinese companies should be welcome to invest in Europe.
Bio fuels in Asia
Increasingly ambitious mandates on the use of biofuels by Asian governments eager to accelerate the transition to cleaner energy and reduce dependence on fossil fuels are posing a growing risk of unintended, irreversible consequences, writes Vandana Hari for Nikkei Asia.
The reality is that biofuels still depend predominantly on traditional feedstocks such as palm, rapeseed, soy, beets and cereals such as corn and wheat. So-called advanced biofuels made from feedstocks that do not overlap directly with food or feed crops, including agricultural and municipal waste, nonfood crops and algae, represented just 8% of the global biofuel supply in 2021 Due to the overlap with food and animal feed, the increased use of biofuels has knock-on effects across a range of commodities and consumer products.
International Shipping
Pressure is growing on the international shipping industry to accept a carbon levy on ships, with the World Bank among those pushing for the measure at an International Maritime Organisation (IMO) meeting this week, the Guardian writes.
The idea is that a levy on the greenhouse gas emissions produced from shipping would encourage companies to upgrade their fleets, run them more efficiently and seek cleaner fuels and technologies. A proposal from the World Bank, seen by the Guardian, would require shipping companies to pay into a fund based on the amount of carbon their fleets emit. Those funds could be spent on reducing emissions from shipping, but the World Bank is pushing to see them directed instead towards projects that could help reduce emissions in poor countries.
Oil Companies under Legal Scrutiny
Oil companies have come under increasing legal scrutiny, facing allegations of defrauding investors, racketeering, and others, due to their role in the climate change debate and decarbonization plans. The Guardian writes that a new paper in the Harvard Environmental Law Review argues there’s yet another way accusation coming: homicide. The authors argue fossil fuel companies:
… have not simply been lying to the public, they have been killing members of the public at an accelerating rate, and prosecutors should bring that crime to the public’s attention.
Homicide is a catchall term that includes charges ranging from manslaughter to murder. The former is a lesser charge where death was caused without intent, while murder is reserved for cases where the defendant either had knowledge that taking a specific action could kill someone or engaged in a premeditated killing.
One of the authors said the fact that fossil fuel companies knew that their products worsened the climate crisis and yet continued to extract oil, gas and coal “comes extremely close” to meeting the definition of murder, though the paper lays out the case for multiple types of homicide charges.