Energy, Politics & Money - 25 April 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we look at:
Declining diesel cracks in Europe and Asia, which EPM notes is a a traditional “early warner” of economic recession
The outlook for US shale and what this means for global oil markets – “plateau” and “rising OPEC+”, both of which have been discussed extensively on EPM before
The modest increase in frontier exploration for crude oil
Continued stress in the American banking system
The increased likelihood of World War 3, as evidenced by the western world’s leading nations to refusal to even consider points-of-view that differ from their own, and the EU’s “doublespeak call” for military engagement in the Taiwan Strait to prevent military aggression
The EU and Japan push-back against a US proposal for G7 countries to ban all exports to Russia
The expected increase in US renewables capacity until 2030: 358 gigawatts of solar panels, 137 gigawatts of wind turbines and 111 gigawatts of energy storage built between 2023 and 2030, all thanks to the IRA
The bio-engineering approach to cement manufacturing, which has the potential to lower cement’s energy needs and consequently CO2 footprint
The view that the car industry’s electrification is "fast and irrevocable", and will leave room for only 10 companies over the coming decade
Japan persuasion of fellow G7 members to recognize the concept of “avoided emissions”, a very dangerous pathway forward in the view of EPM, and we explain why below
General Energy News
Western sanctions and price caps on Russian crude and oil products introduced in December and February had been expected to tighten oil supplies globally, but this has not happened as Russian exports continue despite sanctions, Reuters reports. As EPM mentioned yesterday, India and China have stepped up to take in additional Russian crude oil, and (China in particular) have allowed for additional exports of refined products to keep the global supply – demand equation balanced (just dis-optimized from a logistics perspective). As a result, benchmark European diesel barge refining margins drifted to their lowest since February 2022 last week to about $13.70 a barrel. Similarly, Asian gasoil margins have fallen by 31% in April to the lowest since January 2022 at about $14 a barrel last week. At EPM we want to highlight the fact that traditionally, diesel cracks are considered an “early warner” of economic recession, and we find it surprising that this element is completely missing in the Reuters report. Certainly, Russian exports are higher than expected, and we extensively covered why this is the case (Russia’s shadow fleet of vessels and shipping and trading companies, as well as disagreement between the Global North and South over the Ukraine conflict and the Russian sanctions). But considering the macro-economic environment, the demand of the diesel equation must be looked into as well, if you want to avoid being surprised.
Further on the subject of Russian energy, Bloomberg says a battle awaits between Europe and Asia over medium-sour crude – the grade in which Russia’s Ural’s fall. At EPM we are less convinced. Asia will gladly take in Russia’s discounted barrels, which will translate into less demand for Middle Eastern alternatives. These are more likely to move to Europe – if they do not end up being processed domestically in new refineries such as Al Zour in Kuwait.
Javier Blas of Bloomberg looks at the implications of something well-known for years now, namely that US Shale has been forced by Wall Street to deliver returns instead of output growth. Over the last decade, the US shale industry had become a byword for capital destruction, as shale investors recovered about 50 cents for each dollar they invested during the 2010-2020 period, he says. But while shale pioneers once put growth over profit, burning billions of dollars in the process, today they are focused making money for their shareholders. Peak production is now on the horizon. The consequences are likely to be higher oil prices — and inflation — and a weakened hand in energy politics, to the benefit of OPEC+. If you’ve been following EPM, none of this will strike you as new insight. The article includes a summary of US Shale’s history (version 1.0 for its origins, version 2.0 for the boom days, and 3.0 for today), in case you are interested.
Frontier exploration peaked in the middle of the last decade. Indeed, spending fell from $100bn in 2015 to half that by 2020, the Financial Times writes, quoting Bernstein, a broker. It estimates that activity is now edging up, with total spend on exploration set to rise to $65bn in 2023, from $57.5bn last year. Oil majors are concentrating on plays particularly around the Atlantic. The Orange Basin, stretching between Namibia and South Africa, yielded important discoveries for Shell and TotalEnergies last year. Exxon is having a strong run in Guyana.
Macroeconomics
As we highlighted before, referencing the views of various financial experts (Nouriel Roubini, Jeremy Grantham), the banking crisis that appeared in March is not over yet. First Republic Bank shares sank more than 20% after the closing bell on Monday, as it said deposits plunged by more than $100 billion in the first quarter and it was exploring options such as restructuring its balance sheet, Reuters reports. The company’s investor briefing lasted less than 15 minutes and ended without executives taking questions from analysts. This was reminiscent of calls during the 2008 financial crisis, Reuters highlights. Our EPM view is that this news is likely to trigger another bank run away from First Republic, which will then be absorbed by one of the US’s big banks in order to prevent contagion. Since none of these banks are likely to be eager to step in, some “sharing of the pain” will be agreed among them to make this happen.
Geopolitics
U.N. Secretary-General Antonio Guterres said on Monday that the risk of conflict between global powers was at an "historic high", writes Reuters. "Tensions between major powers are at an historic high. So are the risks of conflict, through misadventure or miscalculation," Guterres told the meeting of the 15-member body on multilateralism and the founding U.N. Charter. In the EPM view an assessment supported by facts – including the fact that 14 of the 15 members of the body quickly blamed one country, Russia, for this current situation. This blunt refusal among global leaders to even consider alternative points-of-view is what, historically, has led to war between them.
Considering the above, it is in the EPM view good to read that according to the Financial Times, the EU and Japan have pushed back against a US proposal for G7 countries to ban all exports to Russia. “From our perspective it is simply not do-able,” said one of the officials, who spoke on condition of anonymity.
EU member countries should deploy warships to patrol the Taiwan Strait in order to deter Beijing’s military aggression, the bloc’s foreign policy chief Josep Borrell said according to Politico. A classic case of “doublespeak”, in the EPM view, the sending of warships is of course an act of military aggression. More importantly, this clearly indicates a “lack of alignment” within the EU as to strategic positioning in the US – China geostrategic conflict, and we refer to French president Macron’s view that the EU should not choose sides. While Borell argus that Taiwan is “economically, commercially and technologically” important to the EU, in our view he is wrong to jump to the conclusion that therefore the EU must be on the US side. There really is no economic, commercial or technological reason to do so. The fact is, the EU does not have the capability to seriously affect the outcome of the US – China geostrategic conflict. As such, the correct strategic response, the one that serves EU interests in the longer-term, is to not take sides, in order to preserve economic, commercial and technological relations with both sides – which is possible since both the US and China would like the EU to be on their side. Borell’s call we believe will be another case of the EU shooting itself in the foot by running after the US, even when the EU interests are not aligned with those of the US. Indeed, similar as to what happened regarding the Ukraine.
Energy Transition & Technology News
Thanks to the IRA, the US will add enough solar and wind energy over the next seven years to power more than 100 million homes, if challenges connecting projects to electric grids don’t get in the way, according to BloombergNEF. The expected projects will include 358 gigawatts of solar panels, 137 gigawatts of wind turbines and 111 gigawatts of energy storage built between 2023 and 2030.
Startups are aiming to show that a new kind of cement mix, based on naturally occurring phenomena, can avoid the huge energy requirements and high carbon dioxide emissions that have characterized cement production for centuries, writes Bloomberg. To achieve its strong, cohesive properties, traditional concrete has long relied on a type of cement called Portland, which uses limestone as a base. When that limestone is heated, carbon dioxide is released as a byproduct. Specific types of bacteria, in the right environment, can mimic the crucial properties of Portland cement, but with the carbon cycle reversed. The bacteria draw in carbon dioxide, then convert it into calcium carbonate. The companies covered in the piece are IBF from Denmark and U.S.-based startup BioMason.
Climate Politics
Japan persuaded fellow Group of Seven members to recognize the concept of “avoided emissions”, Nikkei Asia writes. The ministers' agreement came a day after the Japanese government invited Dominic Waughray of Switzerland-based World Business Council for Sustainable Development (WBCSD), a grouping of CEOs of over 200 global companies, to brief G-7 representatives about avoided emissions, including a related guideline the body had launched in March. The view is that pressuring companies to reduce emissions relative to historical levels does not create the "incentive" for them to innovate and decarbonize. Quantifying avoided emissions would "show who's moving fastest, quickest or being most successful" in offering more low-carbon products and give investors "a good signal" of the companies' efforts not only in reducing emissions but also in adapting and evolving to a more sustainable business model. Colour EPM skeptical. Calculating actual emissions is already hard to do, requiring a variety of assumptions, leaving the practice open to the critique of greenwashing – which is why we support the efforts by Europe and the US to brings formal standards in this area. The calculation of avoided emissions will be even more open to manipulation through assumptions.
The Electrification of Transport
The car industry electrification is "fast and irrevocable", says the Economist. Tough emissions regulations have done much to promote EVs, it says, raising the cost of ICEVs. Innovation in battery and EV technology has done the rest.
The world’s car industry will shrink to only 10 companies over the coming decade, XPeng, a Chinese rival to Elon Musk’s Tesla, has said according to the Financial Times. It also believes that for Chinese companies to be among the last carmakers standing, they would need to have annual sales of at least 3mn vehicles, underpinned by global exports. The world’s largest carmaker Toyota sold 10.5mn cars in 2022, while Tesla sold 1.3mn.
Other
The U.S. Supreme Court has declined to hear bids by ExxonMobil, Suncor, Chevron and others to move lawsuits filed by state and local governments accusing the oil companies of worsening climate change out of state courts and into federal courts, writes Reuters. Numerous state and local governments have pursued litigation against oil companies seeking climate-related damages. The oil companies wanted the litigation to go to federal court, as state courts are seen as more favorable to plaintiffs than federal court.