Energy, Politics & Money - 26 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 take a more detailed look at the IEA’s annual Global Electric Vehicle Outlook. It shows the potential impact EVs will have on oil demand during the 2020s already: more than 10 million electric cars were sold worldwide in 2022 and sales are expected to grow by another 35% this year to reach 14 million. This explosive growth means electric cars’ share of the overall car market has risen from around 4% in 2020 to 14% in 2022 and is set to increase further to 18% this year. By 2030, it expects the average share of electric cars in total sales across China, the EU and the United States to rise to around 60%, avoiding the need for at least 5 million barrels a day of oil. And, it says, Cars are just the first wave: electric buses and trucks will follow soon.
Furthermore, we look at:
The fall in crude prices on Tuesday, as the recent drop in diesel cracks, which EPM discussed earlier this week, is seen by the financial markets as most likely to due to weakness in the global economy
The IEAs solid advice for OPEC
The macro view on inflation from the head of Norway’s $1.3tn oil fund, who believes both climate changes and the push for decarbonization will keep it at a structurally higher level
A review of the current state of the rare earth industry in China
The implications of the fact there’s not enough kitchen waste in the world to make a dent in fossil fuel usage
The European Union agreement to set binding targets for airlines in Europe to increase their use of sustainable aviation fuels
The electric car company BYD becoming the best-selling car brand in China, dethroning Volkswagen
The EU’s platform for joint natural gas purchases that launched on Tuesday
General Energy News
On Tuesday EPM reported on weakening diesel cracks in Europe and Asia, where we highlighted – contrary to Reuters that argued it was purely a supply side driven event – that this could well be the result of lower demand thus an an early warning sign of a weakening economy. Today, Bloomberg says financial markets are speculating that refineries will cut throughput in response to lower demand, and that this is putting downward pressure on crude oil futures. Brent for June settlement closed at $80.77 a barrel on Tuesday, with WTI for June delivery at $77.29 a barrel early morning Wednesday in Singapore. Note: A diesel crack, for those of you who may be unfamiliar with the term, is meant to indicate how much the price of the individual product is contributing to refining profitability.
The International Energy Agency has given OPEC some – in EPM’s view – solid advice, Bloomberg reports. OPEC should be wary of bolstering oil prices as it could hurt the global economy and accelerate the transition away from fossil fuels to clean energy, it says.
Macroeconomics
The global economy is experiencing climate-driven inflation that will contribute to stubbornly high price rises and a long period of low investment returns, says the head of Norway’s $1.3tn oil fund according to the Financial Times. Currently, labour costs are leaking into global price rises, Nicolai Tangen says, but “we are seeing a climate impact” in the rising prices for olive oil, potatoes and coffee. A heavy price tag for the green energy transition and a reversal of the globalisation that had held down manufacturing costs for decades will also be part of the “mosaic” of inflation drivers going forward, he warned.
As the US government debt approaches the $31.4 trillion borrowing cap, U.S. Treasury Secretary Janet Yellen on Tuesday warned that failure by Congress to raise the government's debt ceiling - and the resulting default - would trigger an "economic catastrophe" that would send interest rates higher for years to come, writes Reuters.
Energy Transition & Technology News
Nikkei Asia reviews the current state of the rare earth industry in China. Former President Deng Xiaoping, the leader who spearheaded China's "reform and opening up" policy, once said that "while the Middle East has oil, China has rare earths." The country has the key advantage of being able to handle everything domestically, from mining ore to making magnets. This month, the Chinese government boosted its light rare-earth production quota for elements such as cerium and neodymium to 120,000 tonnes for the first half of this year, up 20% from a year earlier. It is taking a more conservative approach with heavy rare earths, where it cut the quota by 5% from a year earlier. In the light rare earths category China is the dominant player, but it does import from abroad also, in particular from the US. In the latter category, which includes dysprosium, China and Myanmar together hold a near-monopoly, with Chinese companies controlling the Myanmar rare earths industry – nearly all of Myanmar's rare-earth mining projects are Chinese-owned, many of the workers there are Chinese migrant laborers, and trucks with Chinese license plates travel freely to mines in Myanmar and back across the border to Yunnan. According to Nikkei Asia, the aim of the quota changes is to keep prices stable for the powerful rare-earth magnets used in electric vehicles and other renewable energy applications. The EPM perspective is that this could also have a more strategic element to it (things usually do in China), such as ensuring full self-sufficiency, and keeping prices low on international markets to dis-incentivize non-China investment.
An opinion piece in Bloomberg argues that, as we at EPM noted previously, there’s not enough kitchen waste in the world to make a dent in fossil fuel usage. The world produces a bit more than 200 million metric tons of vegetable oil every year. But crude oil production comes to nearly 5 billion tons. Even the most bullish forecasts don’t see global used cooking oil supply rising above 28 million tons a year in 2030, enough to displace about 0.5% of the world’s fossil oil production. Rendered animal fats probably add at most 10 million tons to that total. What this means, in EPM’s view at least, is that in most countries around the world, biofuels are most likely to remain an interesting niche in the new energy area. As such, policy should direct these liquids to the places where they can support decarbonization the most – i.e. aviation and marine – and away from places where alternative decarbonization routes exist – i.e. road transportation. Only in select countries with unique agricultural industries such as Brazil, India and Indonesia, the above might not apply, as these can produce sugarcane and palm oil as well as leverage third generation cellulosic biofuel technologies that convert agricultural waste in liquid fuels.
Climate Politics
The European Union has agreed a deal to set binding targets for airlines in Europe to increase their use of sustainable aviation fuels, in an attempt to kickstart a market for green fuels and start curbing the aviation sector's carbon footprint, writes Reuters. Fuel suppliers must ensure that 2% of fuel made available at EU airports is SAF in 2025, rising to 6% in 2030, 20% in 2035 and gradually to 70% in 2050. From 2030, 1.2% of fuels must also be synthetic fuels, rising to 35% in 2050. Synthetic fuels are made using captured CO2 emissions, which proponents say balances out the CO2 released when the fuel is combusted in an engine. The EPM perspective is that legislation such as this is dangerous as it “picks winners” and, as such, makes decarbonization decisions for industry. In our view a better practice would be to legislate meaningful decarbonization targets and allow the market to decide the best decarbonization pathway.
The Electrification of Transport
The IEAs annual Global Electric Vehicle Outlook is out. It shows the impact EVs have had on oil demand during the 2020s: more than 10 million electric cars were sold worldwide in 2022 and sales are expected to grow by another 35% this year to reach 14 million. This explosive growth means electric cars’ share of the overall car market has risen from around 4% in 2020 to 14% in 2022 and is set to increase further to 18% this year. By 2030, it expects the average share of electric cars in total sales across China, the EU and the United States to rise to around 60%, avoiding the need for at least 5 million barrels a day of oil. And, it says, Cars are just the first wave: electric buses and trucks will follow soon. This confirms the EPM investment thesis regarding EVs, based on analysis going back to 2015 and 2016, and which we have discussed previously: EV’s offer a superior transportation service, and by 2025 are likely to be manufacturing cost competitive with ICEVs, while cost of ownership superior.
The Warren Buffett-backed electric-vehicle maker BYD sold more than 440,000 mostly electric cars in the first quarter of 2023 in China, according to automotive industry data compiled by Bloomberg. This sales volume dethroned Volkswagen as the best-selling automaker in China, which it had been since at least 2008. Vehicle sales under the Volkswagen brand totaled 427,247 units in China in the first quarter, with EVs accounting for only 6%.
The Global Energy Crisis
On Tuesday, about 80 companies have signed up to launch the EU’s platform for joint natural gas purchases. The initiative is designed to prevent structurally higher energy prices for EU energy consumers, writes the Financial Times. Among the 76 buyers and sellers that have already signed up and five that have pledged to do so soon, there were several energy-intensive industries including steel, fertiliser, ceramics and glass. The registered companies will place their orders on the platform, with tenders beginning in early May to match them with suppliers. Matched companies will then negotiate the contracts without the involvement of the commission. Bigger energy companies can act as buyers on behalf of smaller companies or offer services such as shipment. We at EPM doubt this will offset the impact of the absence of Russian gas on the global gas supply–demand balance. At best, the increased purchasing power will shield Europe from some of the resulting price increase, at the expense of the poorer countries looking for natural gas, as we saw in 2022. At worst, it will have no impact when the weather makes a turn for the worse, unlike in 2023.