Energy, Politics & Money - 24 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money view just for you!
Welcome to the Energy, Politics & Money newsfeed of Wednesday 24 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we explore:
Crude oil pricing ebbs and flows
Indonesia’s move to tighten monetary policy, the Euro’s challenges, and the continued pain of inflation
Japan’s plans for next generation nuclear power
Pressure to re-shore EV battery manufacturing in the US
The energy crisis - what is Germany’s strategy to make it through the winter?
And much more…
General Energy News
There was a knee-jerk reaction on the financial markets when the Saudi oil minister hinted at a potential production quota cut, which pushed futures prices up by around $4 per barrel on Tuesday, reports Bloomberg. Brent futures closed just above $96, while WTI futures closed just above $90.
In early trading Wednesday morning, however, after the dust had settled and traders had the time to think things over, crude oil futures returned to the downward path we seen lately, reports Reuters. Brent futures fell 40 cents, or 0.4%, to $99.82, while WTI went down 27 cents, or 0.29%, to $93.47 a barrel. Most attention is going to “bearish information”, namely: the potential for an economic recession, an Iran nuclear deal, and the impact of a strong dollar on oil demand.
Another Reuters opinion piece discusses how the current situation in the energy world could affect longer term crude oil demand. The key point of the piece is clear by its title, “Once people ditch oil, they won’t come back”. In the short term, crude oil and natural gas demand are very inelastic. But in the current world where technological alternatives exist, EMP sees the high price for fossil fuels acting as an incentive to switch to electrified transportation and renewable power generation which is likely to have an impact over the medium term.
The Macro Environment (economics & geopolitics)
Indonesia is the latest country to tighten monetary policy in response to an uptick in inflation. Nikkei Asia reports the country’s central bank raised its benchmark interest rate on Tuesday for the first time nearly in four years. Bank Indonesia hiked its seven-day reverse repurchase rate to 3.75% from 3.5%.
Over in Europe, an opinion piece in Bloomberg argues that while the Euro has dropped to below parity with the US dollar, there’s little hope that even a hefty hike in interest rates would rescue it. This is because, rather than monetary policy, it’s the interlinked threats of a recession and a Russian energy cutoff weighing down the common currency. Of course, the weakening euro has worsened inflationary pressures in Europe, in particular those resulting from higher energy prices.
Another opinion piece in Bloomberg focuses attention on the pain inflation is causing. It is no longer creating problems just for lower income households. Consumers on both sides of the Atlantic are buckling under the weight of higher prices with pressures spreading to more affluent shoppers too! This is changing consumer behavior in a variety of ways, from buying less of certain things, to switching to cheaper brands, or to not buying other things at all anymore.
Climate Politics
Nikkei Asia reports on an important event in Japan’s climate politics. Japanese Prime Minister Fumio Kishida is set to order development and construction of next-generation nuclear power plants at Wednesday's meeting of the GX (Green Transformation) Implementation Council at the Prime Minister's Office. Kishida's administration aims to secure electric power in the medium to long term with a plan to restart up to 17 nuclear power plants beginning in the summer of 2023. The main objective going forward from 2030 will be to consider construction of next-generation nuclear power plants. The plans do not include details as to what these “next generation” will be like, however.
An opinion piece in The Financial Times pushes back on the idea, popular in some circles, that climate policies are the cause of the current energy crisis. It is also true that net zero does not come for free, it agrees. But it highlights – correctly in our view -- that the current energy crisis is primarily the result of the sanctioning of Russia by Europe and the US.
The Electrification of Transport
The Financial Times has caught on to something we have reported on earlier: almost none of the EV models available on the market today qualify for the US climate bill subsidies. Our view is that this is not a mistake or an oversight. It’s done purposely, to incentivize the battery and EV industry to reshore supply chains to the US.
The Global Energy Crisis
Reuters interviewed influential economist Marcel Fratzscher of the German Institute for Economic Research on the energy crisis the country is facing. In our view, he makes some obvious points such as the impact of the Germany’s sanctions on Russia are likely to affect the German economy for a number of years until at least until 2025 (the target year for Germany achieving freedom from Russian gas dependency). His assessment of how bad the impact is going to be is interesting, “The war in Ukraine has done massive damage to the German economy” because it has reduced economic growth from an expected 4.5% this year to only 1.5%. Well, if that is considered massive, we wonder how he will describe the situation that is likely to result when Germany starts to ration gas and electricity supplies over winter? And, consequentially, the run-on diesel and heating oil, spiking prices of all types of energy making them unaffordable for households and large segments of industry. This will lead to an economic implosion with high unemployment and severe stress in the financial system.
In short, in our humble view 😉, Germany should not worry about a percentage point of economic growth more or less. They should impose a “war-time-like” mentally and focus purely on keeping people warm and critical industries running over the coming months.
Reuters and Nikkei Asia highlight how, in the midst of the Global Energy Crisis, China’s economic challenges, due to COVID related lockdowns (and a real estate implosion) have been a blessing in disguise for energy markets. Reuters reports how this has lowered China’s crude oil imports. And, at the same time, China has leveraged the Ukraine crisis by importing more Russian oil – which one could argue supported the crude oil supply by buying barrels that otherwise would have had a difficult time finding a customer.
Meanwhile, Nikkei Asia reports that due to weak energy demand in China – the world's largest buyer of liquefied natural gas – is reselling some of its surplus LNG cargoes. This has provided the spot market with an ample supply, tapped by Europe, despite significantly higher prices. Nikkei Asia also highlights that as soon as economic activity bounces back in the country the situation is likely to quickly reverse.
The Financial Times has a report on the situation in Bangladesh in the midst of the Global Energy Crisis. Soaring energy and food prices - following the Covid-19 pandemic - and Russia’s invasion of Ukraine, is rocking the country of 160 million people as it now faces energy shortages and rising import bills that is in some cases straining its ability to keep up with debt payments. After Sri Lanka and Pakistan, this is another sovereign debt crisis in the making…
Other
As if the Energy Crisis wasn’t bad enough, and as you are likely very aware, Europe is also dealing with the worst drought in at least 500 years, Reuters reports. Two-thirds of the continent is in a state of alert or warning, reducing inland shipping, electricity production and the yields of crops, the August report of the European Drought Observatory (EDO) said on Tuesday.