Energy, Politics & Money - 24 October 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, we draw your attention to a report on Japan’s efforts to “zero China” its supply chain. In the EPM view, this provides insight into why we believe central banks will maintain interest rates “higher for longer”, and your shorter- to medium-term outlook for global economic growth should be structurally lower than that of previous decades.
Furthermore, we look at:
A change in sentiment in the crude oil markets, where fears about the impact of the next round of EU sanctions and the US proposed Russian oil price cap on global supply are becoming dominant – exactly as we at EPM have long said they should, and as is not confirmed by the US Treasury who says Russian oil supplies are likely to decrease by 1 – 2 million barrels per day over the price cap plan.
The Biden administration’s admission that the OPEC+ production cut will not significantly move the needle on actual crude oil production (where we at EPM add it will have an even smaller impact on crude oil exports)
The upcoming Future Investment Initiative in Saudi Arabia, which the leaders of Wall Street are all scheduled to attend, indicating they see no significant risk of the exchange of words between the US and Saudi resulting in a real disruption of diplomatic relations (in line with our EPM analysis of the “public spat”)
The LNG situation in Asia
The chances of central banks “wimping out” in response to the economic effects of (and political pressure over) their monetary tightening policy
The new “team Xi” that will run China for the next few years
A number of moves in Climate Politics, with COP27 in Egypt likely to face strong pressure to slowdown the energy transition, Australia joining the methane pledge, a number of European countries abandoning the Energy Charter Treaty, Canada facing pressure to offer more financial support for Carbon Capture, and the investments needed by South Africa and China for their energy transitions
The desperation in the poorer, Eastern parts of Europe, where many people can no longer afford to warm their houses as temperatures drop to below zero Celsius
The likely International Sustainability Standards Board (ISSB) decision to require company disclosures on Scope 1, 2 and 3 greenhouse gas emissions
General Energy News
Crude oil is starting to trend upward, writes Reuters. Brent crude futures climbed 54 cents, or 0.6%, to $94.04 a barrel during early trading in Asia on Monday, while WTI was up 51 cents, or 0.6%, to $85.56 a barrel. This is not because of the OPEC quota, but because of fears about what the next round of EU sanctions and the US proposed Russian oil price cap will do to supplies.
As you know, at EPM we have said from the moment these policy moves should be feared, and expected to raise prices, as they are likely to lower overall supplies because Russia should be expected to live up to its threat of “no Russian liquids for those who subscribe to the “Russian oil price cap”.
China and India will continue to be committed customers for Russian crude oil, reports S&P Global. But, as Bloomberg reports, Russian liquids will face logistical challenges after the sanctions – there simply isn’t sufficient shipping capacity in the market to move Russian barrels. In other words, some Russian barrels will become stranded due to logistical bottlenecks.
There’s also a Reuters report on how much Russian oil should be expected to become stranded in December as a result of this. Between 1 and 2 million barrels per day (bpd), according to the US Treasury.
As to OPEC+ decision to cut its production quote by 2 million barrels per day, Amos Hochstein, who has been involved this year’s US oil diplomacy with Saudi Arabia, said the actual cuts would be only about a quarter of the headline number. “So the impact on the market is not going to be as significant”, he said according to Bloomberg. In addition, at EPM we also want to draw attention to the fact that over winter, Saudi can reduce production without reducing exports, as its domestic demand for crude oil for power generation purposes related to air-conditioning over summer drops off.
Regarding the “the spat” between the US and Saudi thar resulted from it, which we at EPM analyzed as being only hollow words not indicative of real policy, Bloomberg reports America’s business leaders are set to attend the Saudi Future Investment Initiative, “Davos in the dessert”. In other words, Wall Street sees no significant risks of any meaningful disruption in the relationship between the two countries.
As to natural gas, Nikkei Asia looks at the question whether Asia will have enough of it over the coming winter and further into 2023. It raises the most important point in this conversation, missed by most commentators, which is that with the natural gas link between Europe and Russia largely cut, there simply is a shortage of natural gas on the global market. This is pushing up prices for everyone, which reduces demand as some countries – e.g. the Pakistan’s and Bangladesh’s of this world – are no longer to afford the commodity. Nikkei Assia summarizes the dominant view in the market today, which is that it is unlikely that Asia’s gas-importing countries will fall short of supplies over coming months, but an unexpectedly severe winter could change that. At EM we highlight, again, that all will have to deal with significantly higher prices, though.
Macro-Economics
As a sign of further progression of the trend towards regionalization of the global economy, Nikkei Asia reports Japanese companies are striving to build supply chains that do not depend on China, amid that country's growing conflict with the US. Nikkei Asia highlights, among other things, that this restructuring of the Japanese supply chain is likely to lead to higher costs.
This is one of the reasons we at EPM are of the opinion the world is in a structurally inflationary environment at present. Regionalization of the global economy, and current energy policies in the western world (both the disconnect from Russia and the Energy Transition), increase the costs of supply for everything. It is impossible for central banks to “combat” this inflationary trend. Most will nevertheless try, through tightening monetary policy, which will maintain interest rates “higher for longer”, and thus create further economic headwinds. Leaving the overall outlook for the global economy for the shorter- to medium-term structurally lower than over previous decades.
The Financial Times has an opinion piece that looks at the chances of central banks “wimping out” (borrowing the term introduced by Nouriel Roubini, which we introduced and explained here at EPM about a week ago). A political backlash against monetary tightening is surely coming, it says.
Geopolitics
After securing a third term, president Xi Jinping of China introduced the members of the Communist Party’s Politburo Standing Committee on Sunday. Nikkei Asia prepared a short biography for each of the six members, Zhao Leji, Cai Qi, Li Xi, Ding Xuexiang, Wang Huning and Li Qiang. Bloomberg also carries an article on “the seven”.
Meanwhile, also according to Nikkei Asia, current foreign minister Wang Yi is expected to be promoted to the role of top diplomat, or director of the general office of the Central Foreign Affairs Commission. According to Nikkei Asia, this is an indication China is likely to maintain its “hard-nosed, wolf warrior diplomacy” foreign policy.
Climate Politics
Bloomberg reports the energy crisis resulting (the western sanctions triggered) by Russia’s invasion of Ukraine has set the stage for backsliding at the upcoming COP27 meeting in Egypt. Our EPM view is that, clearly, energy security has risen on the list of priorities. While this is likely to accelerate energy transition plans in some countries, most notably the EU for who there is a geopolitical incentive to do so (lower overall energy dependency on non-bloc countries), others (in particular developing countries) will highlight current increases in coal usage by developed countries as examples of “western hypocrisy” and use that as an excuse to slow down their transition. Also to consider is that fossil fuel projects that are now FID’ed because of the energy crisis, are likely to remain around for the next 20 – 30 years.
France is the latest EU country to withdraw from the continent’s Energy Charter Treaty (ECT), a move that is “coherent” with the country's climate ambitions and the Paris climate agreement, writes Politico. The ECT is an EU initiative, designed to facilitate cross-border cooperation in the energy industry, principally the fossil fuel industry. Among its principle characteristics is that it allows international companies and investors to sue governments over interventions that hit the profits of energy projects, which for obvious reasons is seen as a threat to national climate plans. For this reason, as Politico reported earlier, Spain, the Netherlands and Poland have already announced they are withdrawing from the Treaty, while Germany and Belgium have signaled they are considering their options. The EU commission, in response, has said that leaving the deal would expose countries to lawsuits from existing investments for 20 years, due to a sunset clause that binds them to their obligations.
Australia has joined the Global Methane Pledge, reports Bloomberg, becoming one of the last major developed economies to sign on to an effort to reduce emissions of the potent greenhouse gas 30% from 2020 levels by the end of this decade.
Over in Canada, oil and gas industry representatives are pressuring both the provincial Albertan government, and the federal government in Ottowa, to provide more financial support for Carbon Capture technology, writes Reuters.
South Africa’s plan to kick-start its transition from coal to renewable energy will need $46.5 billion, reports Reuters, more than five times the $8.5 billion Western nations have pledged to the project over the next three to five years. It is not yet clear how the country will fund the remaining $38 billion.
China’s climate goals, meanwhile, need $14 trillion until 2060 for power and transport, says the World Bank according to The Financial Times.
The Electrification of Transport
Autonomous driving would boost the electrification of transport, so much is certain. But despite big announcements and expectations, progress in the AV area is slow. Last week, Tesla boss Elon Musk admitted that full self-driving software was not yet ready to be used without someone sitting behind the wheel, writes The Financial Times. (That is despite Musk earlier announcing, on numerous occasions, a coming launch of autonomous driving, we at EPM note!)
The Global Energy Crisis
The Financial Times reports on the desperate – and highly polluting! – efforts people in the poorer parts of Europe are taking to stay warm over winter. Rates of energy poverty, defined as the inability to afford sufficient heating supplies, will rise significantly in countries such as Hungary, Slovakia and Bulgaria, it says. An increase in the use of toxic fuels also threatens to significantly raise emissions across the region.
ESG
The International Sustainability Standards Board (ISSB) said it has made “significant progress” in refining its draft standards for ESG reporting, according to Reuters. Most importantly from an energy perspective, ISSB is set to require company disclosures on Scope 1, 2 and 3 greenhouse gas emissions. The ISSB standards are expected to be used by Great Britain, while the European Union and United States are drafting their own climate-related company disclosures, but at EPM we note there are ambitions to align as much as possible in key areas such as emissions reporting.