Energy, Politics & Money - 24 July 2023
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup of the weekend’s news, we look at:
The structural weaknesses in OPEC, which predict political instability ahead
The fading hopes for “bazooka-style” stimulus in China, which has significant ramifications for the global economy
The South China Morning Post’s summary of the current US – China diplomatic dialogue: “One side seems to prefer dealing with former leaders rather than current ones, while the other just likes to talk while piling on coercive measures”
The thinking and strategic planning of the US army when it comes to war with China in Asia
The billions of investment by Chinese oil refiners and petrochemical companies the production of high-end chemicals for solar panels and lithium-ion batteries, to profit from growing demand for energy transition technologies
Completion of the world’s first fully sequestered carbon dioxide injection well, by ADNOC (UAE)
The rising costs of offshore wind projects, which is leading to a significant number of cancellations of projects
The view that in the EU, conventional jet fuel will by 2030 be more expensive than its low carbon alternatives, including liquid hydrogen
The lack of consensus at the G20 about how to address climate change, through focusing on a phasing down fossil fuels or through focusing on a reduction of emissions by any means possible
The view from France that the EU populace is likely to fight back against new “green Deal” regulation over the burden it imposes on the lower- and middle-classes
The US efforts to leverage the IRA for establishing a global supply hcain for critical mineral resources out of reach of China
General Energy News
Oil closed last week on the up again, the fourth week in succession, writes Reuters, Brent closed on Friday at $81.07, while WTI closed on $77.07. Behind the increase is the view that production cuts presently in place will cause supply shortages towards the end of the year.
A deeper look at OPEC’s earnings reveals structural weaknesses and helps explain the oil exporter club’s recent efforts to support prices, writes Bloomberg. The Energy Information Administration (EIA) publishes an annual estimate of OPEC oil export revenue, with the latest showing $888 billion for 2022, up 54% from 2021 and a shade over the total for 2014, when oil prices began their mid-decade crash. In real terms, OPEC’s revenue was up 43% from 2021, but down almost a fifth from 2014. At $2,035 per capita, last year’s figure was 30% below the level of 2014. In other words, inflation, population growth and production restraints are having a severe impact on the budgets of the OPEC countries. This limits their ability to invest in the economic diversification plans that are needed to be able to absorb an energy transition.
The International Energy Agency’s (IEA) head Fatih Birol said his organizations oil demand outlook depends on economic growth in China. Because of China’s growing weakness in this area, the IEA will soon publish an updated outlook, he said, according to Reuters.
Macroeconomics
Hopes for 'bazooka-style' stimulus in China are fading, writes Nikkei Asia. At least five global banks slashed their full-year China GDP forecasts last week, it says, as Chinese growth fell short of expectations and investors grew pessimistic about the possibility of a major policy response at the Politburo meeting, which is expected to be held by the end of this month.
Geopolitics
Excellent summary in the South China Morning Post of the US – China diplomatic dialogue at present. One side seems to prefer dealing with former leaders rather than current ones, while the other just likes to talk while piling on coercive measures, it says. As you know, at EPM we see things similarly and therefore agree with the conclusion of the SCMP article: If what passes for diplomacy between China and the United States is any indication these days, we are all in real trouble.
Further on how the US “piles on coercive measures”, Nikkei Asia interviewed general Mark Milley, chairman of the U.S. Joint Chiefs of Staff. This month he met with his counterparts from Japan and South Korea, and himself visited both countries. Regarding China, he said:
They (China) are a challenge, or they want to challenge the United States at sea, in the air, on the ground, in space and in cyberspace. And they're developing ... very serious military capabilities to do that. … We think that China is a revisionist power who wants to revise (US developed) rules in order to put their own rules in, to their own advantage, as a great power."
Milley also noted India during the interview, saying the country is "a very important strategic ally or partner in the region" for maintaining a free and open Indo-Pacific. He said India is very capable militarily and he would work with India to deepen military cooperation. On Japan, Milley said, "it's a capable regional military. And, they're interoperable with the United States' military, because we train together all the time…. The Japanese military, and Japan as a country, would be key to any contingency," he said, where EPM notes that “contingency” in this case means “hot war with China”. Milley also said Japan, the Philippines and Vietnam could be possible operational destinations in Asia for U.S. Army’s newly created “multidomain task forces” that are equipped with wide-ranging capabilities such as long-range fires, air defense, intelligence, cyberwarfare, electronic warfare and logistics support. The units move nimbly on land to carry out operations while evading enemy attacks.
Energy Transition & Technology News
Chinese oil refiners and petrochemical companies are investing tens of billions of dollars to produce high-end chemicals for solar panels and lithium-ion batteries to profit from growing demand for energy transition technologies, writes Reuters. Companies including Wanhua Chemical, Zhejiang Petrochemical Corp and Hengli Petrochemical and state oil giant Sinopec Corp are leading the shift. They are moving from making more basic petrochemicals for polyester fabrics and plastic packaging to manufacturing higher value products such as polyolefin elastomers (POE) used to protect the cells on solar panels, ultra-high-molecular-weight polyethylene for lithium-ion battery separators and carbon fibre for wind turbine blades. "Companies are moving towards serving the new energy sectors where China is already leading in manufacturing," Reuters writes.
Abu Dhabi National Oil Company (ADNOC) has completed drilling on what it claims is the world’s first fully sequestered carbon dioxide injection well, writes Upstream Online. The well will deposit CO2 captured from ammonia producer Fertiglobe’s United Arab Emirates operations.
Offshore wind projects are facing an economic crisis, just as the world needs clean energy more than ever, writes Bloomberg. Soaring costs are derailing offshore wind projects. Soaring materials costs, particularly for steel, forced turbine makers to raise prices. Costs of other key services, like specialized vessels to install the turbines, have jumped sharply as well. And rising interest rates mean that it’s more expensive to take on debt. In the last week alone, a unit of Spain’s Iberdrola agreed to cancel a contract to sell power from a planned wind farm off the coast of Massachusetts. Danish developer Orsted lost a bid to provide offshore wind power to Rhode Island, whose main utility said rising costs made the proposal too expensive. Swedish state-owned utility Vattenfall scuttled plans for a wind farm off the coast of Britain, citing inflation. Together, the three affected projects would have provided 3.5 gigawatts of power — more than 11% of the total offshore wind fleet currently deployed in the waters of the US and Europe. And the numbers could soon expand. At least 9.7 gigawatts of US projects are at risk because their developers want to renegotiate or exit contracts to sell power at prices that they say are now too low to make the investments worth it
EU regulations aimed at penalising aviation pollution will soon erase the competitive advantage of choosing kerosene over lower-carbon alternatives, writes Euractiv. The ReFuelEU law obliges aircraft refueling at any EU airport to uplift kerosene mixed with a set percentage of Sustainable Aviation Fuels (SAFs). European Parliament lawmakers also want airlines to pay more for carbon emissions. They recently voted to include all flights departing from Europe in the EU’s carbon market while speeding up the phase-out of free carbon allowances. According to a study carried out by the EU-funded Clean Sky joint undertaking and McKinsey & Company, kerosene will cost around $300 per MWh by 2050, a six-fold increase from the current price. The study also projects that the price of synthetic fuels, also known as e-fuels or power-to-liquid, and which is around $450 per MWh at present, should decrease to less than $250 by 2050. Liquid hydrogen, meanwhile, which trades at around $300 per MWh, is expected to reduce even more, hitting close to $50 by 2050. At EPM, we don’t know the assumptions upon which the study was based. This leaves us highly skeptical, because of the economics involved in hydrogen and DAC.
Climate Politics
The Group of Twenty energy ministers meeting in India ended without a consensus on the phase-down of fossil fuels, writes Bloomberg, adding to the sluggish progress on climate diplomacy ahead of key meetings this year. While some countries agreed on the need to phase down unabated use of oil and gas, others argued that concerns over emissions could be addressed by carbon removal technologies, according to the meeting’s outcome document.
On the subject “is continued support for the energy transition guaranteed?”, Jean Pisani-Ferry, French economist and advisor to president Macron, says softer fiscal rules and wealth tax are needed to avoid anti-green backlash, writes Politico. EU green requirements risk becoming unpopular and will be perceived as an unfair burden on the poor and middle class, he warns. The influential French economist, who was tasked by Prime Minister Elisabeth Borne to evaluate the impact of the green transition on the economy and its costs, says that more cash is needed to make EU citizens accept controversial green measures.
The Electrification of Transport
Washington is working to establish alternatives to China’s control over critical mineral resources within the Asia-Pacific region, potentially recalibrating the global EV industry, writes East Asia Forum. The US–Japan agreement of March 2023, which allows metals sourced or processed in Japan to qualify for IRA subsidies, is a strategic manoeuvre and could mark the initiation of a series of strategic alliances forming across the Asia-Pacific region. Australia, another resource-rich nation, recently jumped on the IRA subsidy initiative, and Indonesia, which has vast nickel reserves, seems ready to follow suit. In other words, it says, the United States, through its recent policy initiatives, is striving to gain control over a global market that is as geographically dispersed as it is vertically integrated.