Energy, Politics & Money - 26 October 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, we look closely at the US Commerce Department’s Bureau of Industry and Security (“BIS”) new export-controls rule – published 7 October – that explicitly takes aim at “hindering China’s ability to produce and use advanced semiconductors” and how this form of economic warfare affects major players in the semiconductor industry. We at EPM predict other industries with ties to China will experience similar policy changes at some point in the future.
Furthermore, we look at:
The Saudi promise to increase oil production if supply is disrupted.
Trading house Mercuria’s decision to buy out its Chinese investors – could this have something to do with the developing US – China Trade War, or is this just business?
Reshoring of key supply chains away from China and back to the US (that appears to be underway).
The feasibility of a regional power grid in Asia for moving green electrons around.
Promises around climate policies which we at EPM believe will not be kept, for example, Indonesia’s latest decarbonization promise, as well as promises we believe will be (largely) met, such as the EU’s new policy around fine particulate matter.
India’s decision to push for increased climate finance for developing nations at COP27 (and not telling (Western) audiences what they want to hear) and to hold its ground on using a mix of new fossil fuel production and low carbon energy sources to drive economic growth.
Confirmation from European heavy industry that our analysis on how EU sanctions would affect the European economy in the shorter- and longer-term was accurate: conversations around earnings releases indicate major European players consider the outlook bleak with energy prices that are five times higher than those in the US and are therefore unsustainable.
General Energy News
The OPEC+ quota announcement halted the downward slide of the crude oil price for a while, but after industry data from yesterday showed US crude stockpiles rose more than expected, the slide returned. Brent closed at $92 per barrel, while WTI closed at $85. “The prospect of a global economic slowdown and tighter monetary policy has been outweighing the specter of supply reductions in recent weeks”, Reuters reports one analyst as saying.
Meanwhile, Saudi Arabia’s energy minister has signaled a willingness to pump more oil if the global energy crisis worsens, writes The Financial Times, referring in particular to the likelihood of the additional sanction on Russian liquids disrupting supplies.
Mercuria, founded in 2004 and today among the top five global oil traders, moving around two million bpd of oil and refined products, has bought out its Chinese investors. The trading house has bought back the minority stake that Chinese state-owned ChemChina held in the Geneva-based company since 2016, a spokesperson for the company said on Tuesday according to Reuters. At EPM we wonder whether this move is “just business”, or an effort on the part of Mercuria to manage geopolitical risk.
Macro-Economics
Economists polled by Reuters once again cut growth forecasts for key economies, as central banks keep raising interest rates to bring down persistently-high inflation. This brings the outlook of the “official experts” closer in-line with the foresight we at EPM provided you with weeks ago already, namely that a global recession is inevitable under monetary tightening and supply-side driven inflation.
Geopolitics
Just Security has analysed the US Commerce Department’s Bureau of Industry and Security (“BIS”) new export-controls rule, published on October 7. It significantly expands US restrictions on the export to China of semiconductor and supercomputer manufacturing and testing equipment, components, and technologies, with the explicit objective being “hindering China’s ability to produce and use advanced semiconductors”. No corresponding sanctions or export-controls announcements were made by the EU, UK, Canada, or US allies in Asia or elsewhere, the analysis highlights, but it says it is highly likely that such discussions are ongoing, particularly with allies with their own innate advanced semiconductor-manufacturing capabilities who could otherwise potentially step in and fill any gaps created by the new US rules. At EPM we wonder how different this US policy is from its oil embargo policy of 1940, which banned crude oil sales to Japan and thereby helped prompt the bombing of Pearl Harbor. Considering the criticality of semiconductors for the modern economy, it is hard to see this as anything else but economic warfare. Hence we at EPM repeat our warning that every business must urgently do scenario planning around the assumption that its industry too will become the subject of US export rules, forcing abandonment of China as either a manufacturing hub or an export destination.
A few days ago we reported the South Korean companies with semiconductor manufacturing in China, Samsung and SK Hynix, were given a one-year waiver before having to abide by the new BIS Rule. According to Nikkei Asia, in response, SK Hynix sis now considering selling its memory chip production facilities in China. “As a contingency plan, we are considering selling the fab, selling the equipment or transferring the equipment to South Korea”, the company announced. This is exactly as we at EPM forewarned the situation would develop. The US exports controls will force companies to choose between doing business with either the US or China, blocking the road to doing business with both.
Energy Transition & Technology News
At EPM, we highlighted earlier that the US “Inflation Reduction Act” is less about inflation and more about reshoring the supply chains of importance to the Energy Transition away from China back to the US. Bloomberg reports this plan is working as far as the manufacturing of solar panels are concerned. Enphase Energy, which makes components that convert solar electricity into usable energy, now plans to open four to six manufacturing lines in the US following the passage of the law.
On a key question in the Energy Transition, namely “do we use green electrons to produce hydrogen then to ship that around or do we just move the green electrons internationally themselves?”, Bloomberg writes the evolution in high-voltage, direct current technology and ability to lay cables at depths of up to 3,000 meters has strengthened the prospects for the latter. A network that could help shift renewable energy generated in one corner of the region to consumers thousands of miles away is becoming feasible. Please note, dear EPM readers, that the report on which Bloomberg wrote its article was developed by the Asia Green Grid Network which calls for a regional power grid in Asia, so it’s not without bias.
Climate Politics
Ahead of next month’s COP27 in Egypt, countries will be seen scrambling to put up a good show, offering all kinds of pledges and promises to reduce their emissions and/or support others to do so – which over coming months and years we will then read about time and time again, because most countries will not be living up to these pledges and promises. Indonesia will be among those who fall short, we at EPM foresee, because of the active involvement of key political leaders in the fossil fuel industry (primarily coal), and a general unwillingness among the country’s elite to “rock the boat” and preferring to delay action on critical matters as much as possible. We say this because according to Reuters, the country has yesterday pledged to accelerate its decarbonization. The Indonesian government has set a new target to cut emission levels by 31.89% on its own or 43.2% with international support by 2030, more ambitious than its Paris Agreement pledge which was to cut emissions by 29% or 41% with international help, economic minister Airlangga Hartarto said. But, the report notes, the minister did not explain how exactly Indonesia would try to reach the new climate goals.
India has decided not to follow the Indonesian example. Instead of telling (western) audiences what they want to hear, the country has decided to push for increased climate finance for developing nations at COP27, while holding its ground on using a mix of new fossil fuel production and low carbon energy sources to drive its own economic growth, reports S&P Global.
The European Union’s executive arm will lay out plans to drastically cut pollution levels across the bloc, reports Bloomberg, in an effort to bring the EU closer to guidelines laid out by the World Health Organization. It includes a target to cut the annual limit of fine particulate matter – the main pollutant – by more than half by the end of the decade. As it is among EPM ‘s aims to put things into context, please note most fine particulate matters in the air are related to emissions from power plants, industrial operations and automobiles – these industries and the fossil fuels that energize them are likely to be affected by these new rules, therefore.
The Global Energy Crisis
Bloomberg echoes our EPM commentary on the EU’s gas policy from yesterday, saying time is running out for the bloc “to clinch a deal on the latest batch of proposals to tame energy prices”.
The World Bank throws some cold water on the idea that government intervention will be able to protect everyone from high energy prices. “Governments are saying we will take care of everyone, which is just too expensive”, World Bank president David Malpass told the BBC.
As we forewarned at EPM, although supplies of natural gas are at present ample, Europe’s heavy industry is nevertheless at breaking point because the price at which these supplies have been procured are so much higher than previously, and so much higher than what heavy industry in other parts of the world is paying. Reuters reports makers of metals, chemicals and gases said their outlook for the final months of the year had worsened. The surge in energy costs in European – now five times those in the US! – will shrink Europe’s heavy industry, and not even a mild winter can prevent that.