Energy, Politics & Money - 27 & 28 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 acts of sabotage that took out Nordstream 1 and 2 pipelines that carry natural gas from Russia to Germany. Many have laid blame on Russia, but we first answer the question “what will the likely impact be”, as this is what will drive markets going forward.
Furthermore, we look at:
A round of rate hikes across Asia, as we forecasted, as countries seek to protect the value of their currencies in response to US fed rates
Southeast Asia’s car market, traditionally dominated by Japanese players, but where the electrification trend is creating an opening for Chinese players
Easy Jet’s decision to dump offsetting
The decision by banks across Europe to use lending to drive forward the Energy Transition
The geopolitical battle between the US and Europe over a new “plastics pollution treaty”
General Energy News
The Nordstream pipelines 1 and 2 have been severely damaged by what Poland, Sweden, Denmark and Germany consider sabotage, writes Reuters. While there is not enough information to assess the implications for the pipelines longer term, and many have speculated Russia to be behind it, such as Javier Blas over at Bloomberg who argues it is likely to be a message from Russia “with love”, a new front in its energy war against Europe. Our preliminary analysis at EPM is different. We look first at what the attacks represent, i.e. what their (longer term) impact is likely to be. In this regard, if the damage is severe enough, the attacks are likely to result in a permanent break in energy relations between Russia and Germany, i.e. make it practically impossible for Russia and Germany to ever return to pre-invasion relations even if a political solution is found for the Ukraine crisis. We can not see how Russia would see this outcome as aligned with its interests.
Macro-Economics
The central banks of the Philippines, Indonesia, Taiwan, Vietnam and Hong Kong all moved to raise benchmark interest rates, writes Nikkei Asia. The Philippines’ latest hike, by 50 basis points or half a percentage point, brings the benchmark to 4.25%, the highest since August 2019. Bank Indonesia hiked its policy rate for the second consecutive month, also by 50 basis points to 4.25%. Taiwan’s central bank announced a 12.5-basis-point increase to 1.625%, its third hike this year. Hong Kong's monetary authority had also raised its base rate by 75 basis points to 3.5% on Thursday. Vietnam's central bank said it would raise its benchmark rate, currently 4%, by 100 basis points on Friday. This is in line with the dynamic we explained earlier here at EPM, which is that the world is forced to raise rates in line with the US Fed to protect exchange rates.
Energy Transition & Technology News
According to The Financial Times, EasyJet plans to ditch its landmark carbon offsetting scheme, and become one of the first companies to drop what has developed into a controversial approach to achieve net zero emissions targets by 2050. The low-cost airline will now instead focus on investing in new technologies to cut emissions, and stop paying to offset carbon from its flights by the end of this year. At EPM we want to highlight the significance of this move. We have argued for longer that offsetting, which we are not fundamentally against, was at risk of losing public acceptance, primarily due to shortsighted actors using it for shameless greenwashing. We fear this could result in “the baby being thrown out with the bathwater”. Offsetting provides real value if it promotes natural reforestation (rather than preventing further devastation, or through monoculture reforestation).
MUFG Bank and other Asian lenders will focus on how projects designed to reduce carbon emissions in Southeast Asia fit into national decarbonization strategies when making financing decisions, according to Nikkei Asia. Other banks involved in crafting the guidelines include Sumitomo Mitsui Banking Corp., Mizuho Bank, Citibank and Southeast Asian lenders Bank Mandiri and Maybank. Lenders will assess whether each project and the companies involved align with decarbonization paths laid out by host countries. Not all members of the Association of Southeast Asian Nations have published decarbonization plans, so the banks also will refer to a list of emissions-reducing technologies compiled by the Economic Research Institute for ASEAN and East Asia.
An intense competitive battle is starting to take shape in Southeast Asia’s electric vehicle market between incumbent Japanese automakers and new entrants from China, Korea and domestic players in the region. With a population of about 675 million, the prize is worth fighting over, writes Bloomberg. Today, affordable cars from Japanese brands including Toyota, Honda, Mitsubishi, Daihatsu and Mazda dominate the passenger vehicle market. The shift to EVs is opening opportunities for companies like SAIC, Wuling, Great Wall, BYD, Hyundai and VinFast to expand in this growing region as their Japanese counterparts still hold back on offering more battery-electric vehicles to consumers.
Argus spoke with Ton Emans, president of Plastics Recyclers Europe (PRE), about the current state of the European recycling market and the difficulties that may lie ahead for the plastic recycling industry. In the conversation, Emans argues Europe’s targets for recycled plastics usage are border line unrealistic to achieve.
Climate Politics
Close to a fifth of global emissions are now covered by a so-called compliance-based carbon market, up from just 5% a decade ago, as more countries are recognizing the value of putting a price on carbon as a means to achieving their climate goals, writes Bloomberg New Energy Finance. But, mass adoption is still a long way off, as many of the world’s largest emitters such as the US and India remain on the sidelines.
In August, 20 countries, including Britain, Canada, France, Germany and several developing nations formed a “High Ambition Coalition To End Plastic Pollution” to advocate for a treaty against plastics waste, which would include global standards, bans and restrictions on plastic. Now, the United States is seeking to form a counter-coalition of countries to drive negotiations on a global plastic pollution treaty, writes Reuters, and has invited several countries including Australia and Japan to join. This underlines the geopolitical struggles behind these international treaties, similar to the 2015 Paris climate accord. Within this struggle, the US position is that any international agreement should focus on making individual countries take action, rather than coordinated action between countries and regions.
The Global Energy Crisis
Germany finally takes the logical step, reports The Financial Times, as it will keep operating two of its three last remaining nuclear power stations beyond their official shutdown date, the country’s economy minister said.
As we have discussed previously here at EPM, Russian president Putin’s strategy is based on the fact that Europe’s dependency on Russian oil and gas can be used to loosen its resolve to keep helping Ukraine this coming winter. Consequently, his main intent in calling up reserves is most likely less a belief that he can actually turn the direction of the war around by adding more fighters, but more a calculated risk that by prolonging the fight, Western cooperation and support for Ukraine will erode as the Russian embargo on supplying Europe with power will increasingly squeeze European cohesiveness and resolve to keep helping Ukraine. In this strategy, an opinion piece over at Forbes says, Putin is aided by American President Joe Biden, as his energy policies in the midst of the conflict are considered “so contrary to natural gas and oil development in, and their exportation from, the United States that Europe knows it can count on little help from America in terms of making up for the upcoming Russian supply cut”.
Other
Forbes has an interesting piece on the history of fracking, as seen through the eyes of three “Fracking Legends” selected by the Society of Petroleum Engineers (SPE): Ali Daneshy, Carl Montgomery, and Mike Smith.