Energy, Politics & Money - 26 September 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated just for you!
In this roundup, we look at:
The US decision to limit price additional caps on Russian oil exports
A feature on where ‘capped’ Russian oil will flow
Slowing economic growth while the three important global economic regions lose momentum.
China’s strategic moves at the Shanghai Cooperation Organization (SCO) meeting
Plans to increase hydrogen production to 90 MMT by 2030
The EU’s carbon border tax and its implications on the economy
EU food producers, higher costs, and what that means for production
General Energy News
CRUDE OIL DROPS
Oil dropped again today, with Brent sliding below $85 a barrel at one point, as the dollar’s surge and mounting recessionary concerns threatened global demand, writes Bloomberg.
FURTHER CAPS ON RUSSIAN OIL RULED OUT
A US Treasury official has ruled out secondary sanctions to enforce a price cap mechanism on Russian oil exports despite a proposal last week by US senators, reports Reuters. “We don't think secondary sanctions are needed”, Catherine Wolfram, deputy assistant secretary for climate and energy economics at the U.S. Treasury, told reporters on the sidelines of the APPEC 2022 conference. From our perspective at EPM this guarantees increased flows to countries like China and India. And, increase the gap between the average price paid for crude imports by these companies, and Europe, thus strengthening the competitive advantage of their industries on the global marketplace.
COUNTRIES WHERE THE OIL WILL FLOW
Reuters has a deep dive on the countries that could be willing receivers of the barrels that will no longer flow to Europe once it adopts the price cap / implements the sanctions defined by its 6th sanctions package. The main challenge that will need to be overcome is shipping. New routes for Russian crude are generally longer, hence require more capacity from the global shipping industry – which isn’t available at present.
Macro-Economics
MORE FINANCIAL INSTABILITY
Most economists, investors and traders have by now largely internalized that the global economy and financial markets are navigating three regime changes, says Mohammed El Arian writing for Bloomberg. Predictable injections of central bank liquidity and floored interest rates have been replaced by a generalized global tightening of monetary policy. Economic growth is slowing significantly as the three most systemically important regions of the global economy lose momentum at the same time. The nature of globalization is shifting from the presumption of ever closer economic and financial integration to greater fragmentation in part because of persistent geopolitical tensions. While these factors drive volatility, two additional factors made last week particularly unsettling. The first was the accelerated loss of trust in policy making by central banks and governments. The second additional factor relates to the flows of funds and the implications for market liquidity. All this points to more instability ahead, says El Arian.
Geopolitics
CHINA MOVES TO SECURE STRATEGIC FREEDOM
The National Interest features an analysis of the recent meeting of the Shanghai Cooperation Organization (SCO) in Uzbekistan. According to the analysis, the SCO members bond of geo-politics, primarily shared grievances about western politics in the regions of importance to them; and geo-economics, which mostly concerns infrastructure projects that bond their economies together. The former gets most attention in western media, the author argues, while the latter is more important. Coming out of the Samarkand, Uzbekistan meeting, for example, are important steps forward in China’s “China-Central Asia-West Asia Corridor” strategy, which aims to link the Chinese economy to Europe through Central Asia, Iran and Turkey, to bypass the regions oceans controlled by the US and Russia. As such, the recent SCO meeting highlighted how China is strategizing to “free” itself from control by other countries with geo-strategic ambitions: create physical connections with partner-states that cannot be controlled / interfered with by competitors, use the physical connections to integrate the economies of the partner-states with the economy of China, use the economic interconnections to gain political leverage in the partner-states.
Image: President Xi of China front-and-center during the recent SCO meeting in Uzbekistan.
Climate Politics
HYDROGEN OUTPUT TO GROW
According to Reuters, more than 20 countries, led by Japan and including the United States, Australia and Germany, have agreed to boost output of low-emission hydrogen to at least 90 million tonnes a year by 2030 from 1 million tonnes now, the Japanese industry ministry said on Monday. The mentioned 90 million tonnes is roughly the world’s current production of hydrogen. Japan did not explain how the coalition would deliver.
EU CARBON BORDER TAX
The EU concept of a carbon border tax aims at establishing a level playing field for domestic manufacturing industries when a carbon tax is implemented in their country. The carbon border tax is then imposed on imports from other countries that do not have similar climate policies. The EU plan phases in starting in 2023 but currently isn’t scheduled to fully go into effect until 2026. The Conversation has a fascinating article discussing how various forms of the carbon border tax concept would impact global competitiveness, looking at particular at the issue of excluding fossil fuel imports (the current EU proposal) versus including them.
The Electrification of Transport
AUTO INDUSTRY GREENING EFFORTS
The auto industry’s drive to a greener and cleaner future is a major risk for companies in its supply chain, writes Reuters. Many suppliers are consequently making large investments to green up their acts, from developing recyclable parts to hooking up their businesses to renewable energy. Many say they have little leeway to raise the prices they charge big automakers, which are themselves laser-focused on costs as they shell out tens of billions of dollars to reinvent themselves for an electrified, lower-carbon era.
AIR TAXI INDUSTRY TO SHRINK
The number of companies in the electric air taxi industry will shrink next year as investors tighten their belts amid global economic uncertainty and focus on projects they believe will come to fruition, the chief executive of a Boeing-backed venture has said according to The Financial Times.
The Global Energy Crisis
EU FOOD PRODUCTION HIT BY HIGH ENERGY PRICES
Reuters reports on an additional consequence of the energy crisis in Europe. It says that across northern and western Europe, vegetable producers are contemplating halting their activities because the high energy prices leave them unable to afford operations, further threatening food supplies.