Energy, Politics & Money - 27 February 2023
Independent, objective, and politically neutral analysis of global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, we continue our detailed analysis of diplomatic events surrounding the Ukraine War.
Firstly, we look at China’s intent and approach. We at EPM are of the opinion it is trying to drive a wedge between the US on the one hand, and the allies it relies upon plus independent countries on the other. This it will do by arguing the US past actions show that its current plans are not aligned with the interest of other countries – while dangling carrots in front of these other countries to tempt them to at least become passive in the Ukraine conflict, but ideally align with China.
Secondly, we look at the broader trajectory the Ukraine conflict is on. Here we conclude:
China’s position will further accelerate the regionalization of the global economy
Russia and the US have maneuvered themselves into positions where they are essentially forced to cross each other’s “red lines”, and
Therefore, you should prepare your portfolio for the implications of World War 3.
Furthermore, we look at:
Russia’s halting of oil supplies to Poland via the Druzhba pipeline, a day after Poland delivered its first 4 of 14 Leopard tanks to Ukraine.
The outlook for oil demand in India
CATL’s offer of discounted prices on batteries to smaller Chinese electric-vehicle makers
The EU's Carbon Border Adjustment Mechanism, which is set to affect developing economies the hardest
The Bloomberg assessment of Germany’s energy transition plan: unaffordable ($1 trillion) and impossible (solar panels covering the equivalent of 43 soccer fields and 1,600 heat pumps to be installed every day; 27 new onshore and four offshore wind plants to be built every week)
The Reuters report on DOW’s promise to recycle
General Energy News
According to the CEO of Poland’s largest refiner PKN Orlen, Russia stopped the flow of oil to Poland via the Druzhba pipeline, writes Reuters. The pipeline – which is exempt from EU sanctions imposed on Russia following its full-scale invasion of Ukraine – came a day after Poland delivered the first of 14 Leopard tanks to Ukraine.
India’s Oil Ministry has forecast that the country’s fuel demand will grow by almost 5% in the 12 months starting April. That would almost see it match demand growth in China — following COVID reopening— and easily exceed the International Energy Agency’s most recent estimate, writes Bloomberg. Looking further ahead, it rightfully says
If Prime Minister Narendra Modi can engineer the economic transformation he’s promised over the rest of the decade, India will start to usurp China as the key demand driver in global energy markets.
Geopolitics
The BBC shares its view on the China’s diplomacy around the Ukraine conflict. It says China's main talking points have remained the same for a while now, calling for respect for sovereignty (for Ukraine) and the protection of national security interests (for Russia), while opposing the use of unilateral sanctions (by the US). The West may come away unimpressed, but convincing them was never likely the main goal for Beijing, it says – a perspective we at EPM agree with. China is attempting to undermine US leadership, which, as we highlighted earlier, was evidenced also by its engaging of core US allies Germany and Japan (as well as France, Italy and Hungary) in the run up to the release of its peace proposals. The BBC further highlights the language of the Chinese proposal is clearly directed to the “Global South”, i.e. the countries in South East Asia, Africa and South America.
In this light we at EPM believe the Nikkei Asia report that China has stepped up its engagement with the EU, offering to revive a planned investment deal in an attempt to improve EU – China relations, should be read. China will be using the economic carrot, while continuing to make the intellectual point that the US is acting against the interests of its allies, to try and win countries over to its side. Agreed in 2020, ratification of the agreement stalled after Beijing sanctioned EU officials in response to European bloc sanctions over alleged widespread human rights abuses in the Xinjiang region. Now, China says, “We are actually listening to initiatives from the EU side; our proposal is that we leave the sanctions simultaneously.”
As to why it took China over a year to formally engage in diplomacy around Ukraine, and why it chose to do it so carefully – offering what could best be described as “principles for peace” rather than an actual peace plan – an opinion piece over at Asia Times argues that China is aware it needs to tread carefully. While China’s world view is aligned with that of Russia, as in it too believes the US is aggressively pushing countries around in order to preserve its hegemonic position and using NATO to contain potential US-adversaries, if it sides with Russia too clearly it gives the US an opportunity to (further) turn public opinion in the West against China. Meanwhile, if it does not support Russia enough, it risks losing its most important ally. And lastly, a failed mediation attempt would signal “Chinese weakness and diplomatic incompetence” – which would be painful as president Xi is trying to establish China as an international leader.
Our expectation at EPM is, therefore, China will continue to cautiously engage, primarily to drive forward its viewpoint that the US is pushing for war and that this goes against the core interests of the US allies – notably Germany and Japan – but also the wider Global South. While at the same time materially supporting Russia, from behind a curtain as much as possible, through technology transfers, energy purchases, and possibly intelligence sharing, but without providing direct and active military support.
China’s support for Russia was evident in India, where the G20 finance ministers and central bank chiefs met. They concluded a two-day meeting without a joint communique, as China backed Russia against language concerning the war in Ukraine, writes Nikkei Asia.
Meanwhile, Project Syndicate notes, Frans Timmermans, Executive Vice President of the European Commission, argues the only path to peace in Ukraine is more war. “Negotiations cannot start until Ukraine’s territorial integrity has been restored”, he says, while, in a classic case of Orwellian doublespeak, he also says “we should all aim for a swift conclusion of the fighting.”
Based on comments such as these, but also pronouncements by US and NATO officials before and at the recent Munich Security Conference (Feb 17-19), another opinion piece at Asia Times argues there can be little doubt that the US war aim in Ukraine is regime change in Russia and the decisive defeat of Russia to the point of de facto unconditional surrender. US Vice President Kamala Harris there declared that “The United States has formally determined that Russia has committed crimes against humanity”, which is important because crimes against humanity cannot be dealt with in a negotiation. It demands a total war, “for as long as it takes”. The author concludes from this (and other declarations), most of NATO and the US see themselves now in a total war conflict.
A further opinion piece in Asia Times says Putin acts in full realization of the above. Its author analyzed Russian president Vladimir Putin’s recent speech, and noted it included a warning for NATO. Putin told his American rivals that they were to remove their offensive long-range weapons systems in Ukraine, otherwise Russian forces would begin directly targeting those systems. The reason is, these systems will be used by Ukraine to strike deep inside Russia. And while Ukraine certainly has a right to defend itself, the fact that it is doing so with capabilities that it only has thanks to the Americans means that the United States and NATO are now – in the eyes of Putin – direct combatants. That is why Putin said the Americans will bear the responsibility for these actions should Russia be attacked by such systems.
Unfortunately, should these weapons systems be targeted by the Russians, it should be expected that Americans will die, because the American long-range systems are likely staffed or maintained at least partly by Americans. This creates a very dangerous situation, in particular because the current situation is one where neither the US nor Russia can walk away from. The US cannot backtrack on its support for Ukraine, as that would communicate US weakness, and threaten its position of leadership in Europe and East Asia. Russia, meanwhile, can not accept strikes on the Russian heartland with American supplied weapons, or anything short of victory in east of the Dnepr river. So both sides are likely to cross each others red lines. It concludes, therefore, with the view that historians will eventually look back at the speeches of the Russian and American leaders on the one-year anniversary, and identify them as the moment when the Russian-Ukrainian war truly became a world war.
As to what war could look like, a tabletop war game conducted by Japan’s Sasakawa Peace Foundation reported on by Nikkei Asia concluded that in a war over Taiwan, the US could lose up to 400 jets with over 10,000 soldiers killed or wounded, while Japan could lose as many as 144 fighter jets, with casualties reaching up to 2,500. Taiwan could lose 18 warships, 200 warplanes and 13,000 soldiers. China could lose 156 warships, including two carriers, along with 168 fighter jets and 48 military transport aircraft, and more than 40,000 of its soldiers – while failing to seize control of the island.
Climate Politics
The EU's Carbon Border Adjustment Mechanism is set to affect developing economies the hardest, writes S&P Global.
The Electrification of Transport
CATL, the world's largest battery maker, has offered smaller Chinese electric-vehicle makers discounted prices on batteries, writes Reuters. In exchange for the discount, the automakers would have to pledge most of their battery supply contracts to CATL. One analyst spoken to by Reuters says
The reductions that CATL is offering would help the Chinese EV industry. From the Chinese viewpoint, with China having the dominant electric vehicle market, they don't want to lose that momentum. … If some of those EVs with discounted batteries end up in Europe, it could cause trade tensions.
The Global Energy Crisis
On the EPM theme of “the worst is yet to come”, Bloomberg writes that while Germany has set aside more than €260 billion ($275 billion) to deal with the immediate risks of an energy crisis triggered by Russia’s war in Ukraine, the ultimate fix will be much costlier. And it doubts the country can pull it off at all. The pending price tag for future-proofing the country’s energy system is projected to amount to over $1 trillion by 2030, according to BloombergNEF. The costs include investments in upgrading power grids and above all new generation to manage the phase out of nuclear and coal plants, handle increased demand from electric cars and heating systems, and meet climate commitments. The transition will require the installation of solar panels covering the equivalent of 43 soccer fields and 1,600 heat pumps every day. It also needs 27 new onshore and four offshore wind plants to be built per week.
Other
US petrochemicals giant Dow Inc and the Singapore government said they were transforming old sneakers into playgrounds and running tracks. Reuters put that promise to the test by planting hidden trackers inside 11 pairs of donated shoes, and found most ended up for sale on flea markets in Indonesia.