Energy, Politics & Money - 27 January 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, EPM takes a closer look at the electrification of transport. One of EPM investment theses – formulated in 2015 – is that electrification will go faster than “market consensus”. We were ridiculed by many in the Oil & Gas industry, but over the past 8 years developments have been exactly as we foresaw in 2015 with EV sales growth globally at around 60% annually. As you can imagine, this has further strengthened our conviction in our original viewpoint.
In 2015 we also predicted that the period 2023 – 2025 would be critical as this is when we expected the cost of batteries to reach the level where EVs become “manufacturing cost competitive”. The recent rise in in lithium prices might delay this but at the same time it indicates EV demand growth remains strong.
Today EPM covers Toyota’s announcement that it will replace its CEO, with the new appointed CEO to focus on mobility as a service and electrification. What this means is that even the most hardened opponents of battery electrification are now beginning to realize that “the ship has sailed” and the coming electrification wave is unstoppable.
Analysts in India are now reconsidering their forecasts for gasoline demand. Most analysts expected India to experience continued gasoline demand growth until well into the 2040s. But, EV penetration is growing rapidly leading to a reconsideration of peak oil demand. The mid-2030s seems to be a more realistic date for this momentous development.
Furthermore, EPM looks at:
Chevron’s plan to triple its budget for share buybacks to $75 billion
John Kemp’s view on the possible forward trajectories of the global economy, the most likely of which are, in his view, “recession in 2023” or “another round of interest rate hikes in 2923 leading to recession in 2024”
The looming agreement between the US, The Netherlands and Japan regarding restrictions on semiconductor technology exports to China, where EPM explains why this raises the specter of war
China plan to ban the export of solar manufacturing technology
The work in China on formulating a new strategy for the country vis-à-vis Taiwan
Daniel Yergin’s review of the energy transition
Long-duration grid-scale battery projects using alternative chemistries in the US
China’s rise to the top of the auto industry
The pressure on Wall Street banks to reduce their exposure to fossil fuels
General Energy News
Reuters reports Chevron will triple its budget for share buybacks to $75 billion. They are expected to report record earnings for 2022 with a majority of the earnings going into shareholder returns – not investment in conventional fossil energy or renewable energies.
Reuters also reports the rapid take-up of electric vehicles in India is prompting a major rethink about the country's long-term fuel demand. The country has lagged major economic peers in Europe and Asia in the adoption of EVs but sales are now picking up and investment in the production of new autos and energy infrastructure is accelerating. This means India’s gasoline consumption is likely to peak sooner than previously thought, according to some analysts and industry participants, which will force top oil firms to expedite transition plans to alternative business lines with a notable increase in petrochemical manufacturing. Previous estimates for peak gasoline demand were looking at the mid-2040s but this moment is now more likely to occur mid 2030s.
Macroeconomics
John Kemp at Reuters notes that optimistic investors are hoping for a soft landing in 2023 - with inflation decelerating while the business cycle slows but avoids outright recession. But, he says there are two more likely scenarios: (1) inflation fading because the economy slides into recession, or (2) continued inflationary growth sparks a fresh round of price increases forcing central banks to raise interest rates further.
Geopolitics
Nikkei Asia takes a deep dive to examine China-Taiwan relations. China’s current policy regarding Taiwain is “one country two systems”. Its origins go back to when British-ruled Hong Kong was returned to China in 1997 and was guaranteed a high degree of political autonomy. The formula which originated in the era of former leader Deng Xiaoping was an important strategy for the future peaceful unification with Taiwan. But after Chinese president Xi ordered a hardline stance on Hong Kong, Taiwanese public opinion changed dramatically. The “one country two systems” plan will not work anymore and China’s top leaders know this. President Xi is now working out his own Taiwan unification strategy and has tapped Wang Huning for this task. There are no indications as to when the new strategy might be revealed, but it will be the yardstick by which China will measure progress.
Meanwhile, Bloomberg reports that US, Dutch and Japanese officials are set to conclude talks on limits to China’s access to advanced semiconductor machinery. EPM’s view is that the agreement severely affects China as it cuts it off from one of the key “ingredients” of the modern economy – meaning this is a move similar to the US’s ban on oil exports to Japan that led to WWII. There are two ways this can end. Either China doubles down on developing its domestic semiconductor industry and achieves the technological breakthroughs it needs which would further eat away at the US’s global geostrategic dominance in a peaceful manner. Or, if China gets stuck in semiconductors, it will at one point feel left with no choice but to use force to break free – we say this because this was the response also of Japan to the mentioned US oil embargo . Another possibility, though less likely is that domestic pressures force the Netherlands and Japan to limit their support for US geostrategic plans. ASML from The Netherlands is very unhappy with the political decisions of the Dutch government. It argues the US is double faced with is semiconductor policy: it aims to ban exports of cutting-edge technology in which ASML has a globally leading position, but at the same time continues to allow exports of the semiconductor grades that are used in weapons manufacturing in which US companies have a globally leading position.
In what seems to be a tit-for-tat response to the chip manufacturing ban, China is considering an export ban on solar manufacturing technology writes Bloomberg. The move underscores the growing strategic importance governments are placing on solar manufacturing as the technology becomes the planet’s biggest source of new energy. Countries from the US to India are trying to develop domestic supply chains to eat away at China’s current dominant position.
Energy Transition & Technology News
Over at Project Syndicate Daniel Yergin argues the current climate change related Energy Transition is fundamentally different from previous transitions because it is public policy driven rather than technology driven. What he means is that previously we moved from coal to liquids because liquids provided a technologically superior energy solution – cheaper, faster, and for longer distances. This time round policy is trying to create energy solutions that are technologically superior to liquids – because they are not quite yet. As a corollary of this fundamental difference, the imagined timeline for the current, climate change related Energy Transition is also very different. Previous transitions played out over multiple decades because so much money is invested in the energy system at any given point in time. This transition is expected to be completed in about 25 years. Yergin’s underlying message is that policy makers need to be well informed of the scale of the challenge as otherwise they could easily elect for policies that backfire – such as forcing changes upon the supply side when alternatives for current solutions have not yet been developed to scale yet
Long-duration grid-scale battery projects using alternative chemistries are advancing in the US says S&P Global. Zinc8 is a technology developer and manufacturer of zinc-air long-duration energy storage systems for utilities, commercial and industrial facilities, and remote microgrids. The company's technology has been developed using zinc as the anode fuel. When the system delivers power, zinc particles are combined with oxygen drawn from the surrounding air, and when the system recharges, zinc particles are regenerated and oxygen is returned to the surrounding air. The regenerative system does not need fuel replacement. Form Energy has developed a similar battery system but based on iron-air.
On LinkedIn Paul Martin “crunched the numbers” on the plan for using hydrogen as a replacement for natural gas through gradually adding H2 to the natural gas grid. In his scenario, H2 is made from water using renewable electricity when it’s available. It’s comprehensive which makes it quite a long read, though.
At EPM we have extensively covered the questions how the US’s Inflation Reduction Act will affect the energy transition and trans-Atlantic relations. But just in case you are still left wondering, the Financial Times has a deep dive on the subject.
S&P Global looks at the EU’s efforts to emulate the IRA. The Green Deal Industrial Plan, announced January 17, is an extension of REPowerEU. Analysts say it could help reignite Europe's clean-tech prowess and bring capacity back to Europe from historically lower-cost manufacturing centers in Asia and elsewhere.
The Electrification of Transport
China’s auto brands are wooing more and more foreign customers, propelling the nation toward becoming the world’s second largest exporter of passenger vehicles. A milestone that could reshape the global auto industry and spark new tensions with trading partners and rivals writes Bloomberg. China now exports 2.5 million cars annually, 100,000 fewer than the world’s second largest car exporter Germany. The target is to sell 8 million passenger vehicles overseas by 2030 which is more than double the exports of the world’s largest car exporter Japan. China tends to export relatively cheap cars. At around $13,700, the average price of an exported China-made passenger vehicle was about one-third that of a German car in 2021 and about 30% less expensive than a Japanese make. But, electric cars are an important element in the overall strategy.
Toyota made a surprise announcement that Akio Toyoda will step down as president and CEO on April 1 and will be replaced by Koji Sato, Chief Branding Officer, writes Nikkei Asia. Sato has been tasked to “fully remodel” the automaker as a mobility company. Sato himself says his team will work to “accelerate electrification and create vehicles that meet local needs”.
ESG
Investor group the Interfaith Center on Corporate Responsibility is pressing six Wallstreet banks to move faster on reducing their financing of fossil fuels to meet global climate goals writes Bloomberg. The investors are asking the lenders, including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp., to phase out their funding of oil and gas exploration and development.