Energy Politics & Money - 26 July 2022
Curated news from the worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money news feed of Tuesday 26 July 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 look at
Where oil prices are likely to go (and where they have been)
China’s economic slowdown and the impact on the world economy
Pressure on Tesla to eliminate its support for Indonesian nickle projects and ban it from use in its EVs
Major pressure on Europe resulting from sanctions and countermoves by Russia that will significantly challenge the European economy, all energy consumers with high prices, and put downward pressure on the Euro.
Review TotalEnergies’s strategic focus on traditional and renewable energy.
General Energy News
We are covering details of Russia’s decision to cut gas supplies to Europe - again - to just 20% of Nord Stream 1’s total capacity in greater detail in the dedicated section The Global Energy Crisis (see below). Here, in General Energy News, we highlight oil rose on Monday on expectations Russia's reduction in natural gas supply to Europe could encourage a switch to crude, though concerns over weakening fuel demand because of an expected increase in U.S. interest rates limited gains.
The one region in the world - the Middle East - where one would expect increased investment in conventional energy is doing so. The EnergyVoice reports Middle East and North Africa energy investment could reach $879 billion over the next five years, using data from Apicorp.
The Financial Times notes that while the oil price has trended down over recent weeks, primarily due to (warranted) fears of a global recession, the oil market remains in the danger zone. The factors that ratcheted energy markets into a tighter position over the past year remain in place. Global stockpiles are low and the energy supply system is running at near flat out capacity. The OPEC+ alliance of oil producers has very little spare capacity and what is left is held almost entirely by Saudi Arabia and the United Arab Emirates. Refiners are pushing out about as much fuel as they can. Governments are drawing down their emergency supplies at a record pace. So if, by some miraculous intervention a global recession can be avoided, oil prices would go up strongly again.
The Financial Times featured an interesting summary of the crazy ride oil price followed the past 2 years looking at events that drove volatility and caused seemingly crazy price changes – from record lows to (almost) record highs in about 24 months!
The Macro Environment (economics & geopolitics)
The South China Morning Post carries an opinion piece about the euro, arguing much of what we said about Europe in general, and in response to the ECB monetary policy announcement, over recent weeks. “Winter will be a major test for Europe’s economy, which could easily slip into recession if the energy supply crisis is not resolved soon. The risk of energy rationing for industry, and its impact on inflation and employment throughout Europe, comes at the worst possible time as the European economy is still struggling to get back on its feet after over two years of the Covid-19 pandemic, global supply-chain shortages and vulnerable economic confidence… The worry for Europe’s leaders is that the united front towards Russia could be at risk if countries break ranks to secure vital energy deals to last industry through the winter… This should be the point in the cycle where the ECB is easing monetary policy to lessen the chances of a more serious downturn. Unfortunately, its hands are tied to battening down euro-zone inflation… The ECB has been slow to increase rates, leaving the euro exposed to the quicker pace of monetary tightening from the US Federal Reserve. This imbalance is unlikely to change soon, posing even more downward pressure on the euro relative to the dollar.”
Looking at China and its continued slowdown - due in part to the Government’s Net Zero Covid policy and the slowdown in its real estate sector - Bloomberg reports this is already affecting global aggregate demand. Apparently, China’s economic slowdown is spilling over to major exporting nations in Europe and East Asia through falling demand for manufactured goods, causing Germany and South Korea to post rare deficits with the world’s second-largest economy.
ESG
Bloomberg reports dozens of organizations have asked Tesla to terminate its direct investment plans in Indonesia’s nickel industry and to bar nickel sourced and produced in the country from being use in its cars. An open letter addressed to the company said “The nickel industry in Indonesia has a record of environmental damage, criminalization threats that abuse democracy and equity, the threats to the vulnerable groups, and multiple violations of law”. The letter warned nickel mining would shrink forests, potentially pollute water, while disrupting the lives of indigenous communities.
The Global Energy Crisis - Enhanced Focus
Reuters reports Russia will again cut gas supplies to Europe, to just 20% of Nord Stream 1 capacity. The Kremlin says the gas disruption is the result of “maintenance issues and Western sanctions”, making it clear this is all about the turbine that got caught up in the sanctions and are still making their way back to Russia. (Which, according to Siemens - the contractor handling maintenance - is now due to Gazprom). But beyond Russia’s action, we feel it is important to see the bigger picture: when Europe announced sanctions targeting Russia - following its invasion of Ukraine - it started a continent wide economic war. In this context, in order for Russia to maintain leverage over Europe, it is reasonable to expect that it will do whatever it can to keep Europe on edge i.e., never allowing European inventories to remain at levels that could ease concerns over the coming winter. This explains why Russia is providing gas supplies at levels that will not allow Europe to build sufficient inventories to heat freezing Europeans. Our line of thinking and analysis is highlighted by Reuters. As long as Europe maintains sanctions, one should not expect Russia to show any desire to solve Europe’s energy needs. Unless Europe can find a way to manage its winter energy needs without Russia, the crisis will grow worse due to energy supply shortages leading to exorbitant energy prices for households and industry.
Beyond natural gas, Reuters also highlights restrictions on diesel imports from Russia are amplifying the cost of living challenges across the region concluding that that “Fundamentally, Europe can't really survive without Russian diesel”. High diesel prices, of course, affect the wider economy and inflation as it is the preferred fuel of industry and farmers.
Other
The Financial Times followed last week’s interview with Ben van Beurden, CEO of Shell with an interview featuring Patrick Pouyanné, CEO of TotalEnergies. Under Pouyanné’swatch, TotalEnergies has growing its conventional and new energy business. As FT summarizes it, “Pouyanné seems determined to play both sides of this paradox. The group he oversees is pursuing some of the industry’s most contentious developments, like the $20bn liquefied natural gas play in Mozambique and a $10bn oil project and pipeline in Uganda, which has become a lightning rod for climate activists and critical investors. Yet at the same time the company renamed TotalEnergies last year to signify its diversifying interests and is investing billions of dollars in clean energy projects from wind farms in the UK’s North Sea to solar plants in Iraq and to hydrogen installations spanning the US to India. Investment bank RBC Capital Markets values Total’s low-carbon business at $35bn, making it far larger than that of any of its big competitors.”