Energy Politics & Money - 27 July 2022
Curated news from the worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money news feed of 27 July 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we examine:
US efforts to calm oil prices
G-7 efforts to reduce coal consumption in developing Asian countries
Recessionary pressures are gaining momentum and steam and are expected to slow global economic growth
Continued pressure on Indonesia to halt nickle production
US efforts to intervene in Europe’s energy crisis
General Energy News
Conflicting pieces of information came available yesterday, net-resulting in a slight oil price increase. The API reported US crude stockpiles fell by 40 million barrels, which is supportive of an oil price increase, but the market is anticipating another interest rate hike next week, which is bad for demand and thus puts downward pressure on the crude oil price.
Energy Transition & Technology News
According to Nikkei Asia, Thai engineering company TTCL has opened a plant to produce a biomass fuel from agricultural waste like corncobs and husks, as a greener alternative to coal. The facility in northern Thailand's Lampang Province uses a process known as torrefaction to produce a fuel with greater energy density than standard wood pellets. It is about on par with Indonesian coal, and also comparable in price under current market conditions, the company said. These so-called black pellets can be burned alongside coal at power plants or factories using existing equipment with little modification. We are very bullish on biofuels made from waste, in particular agricultural waste as this is such great supply globally.
Also according to Nikkei Asia, the Group of Seven major economies will expand an initiative to support such developing countries, like Indonesia, in their efforts to phase out coal. G-7 members will provide financial and technical support to help developing countries transition their mainstay coal-fired power generation to renewable energy in a push to accelerate decarbonization. As a first step, support will be provided to Indonesia, Vietnam, India and Senegal. Japan and the U.S. are expected to be Indonesia's major contributors, with G-7 members and the European Union serving as partners. The U.K. and the EU would be major contributors to Vietnam, with the U.S. and Germany filling the role for India. The amount of assistance for each will be discussed in the future. We note that pledges have been around for a very long time, and very little has so far translated into real support. Will things be any different this time around? We will see.
Unsurprisingly, renewable energy is not immune from the global inflation trend. Bloomberg highlights that solar power equipment makers Tongwei and Longi boosted prices after polysilicon costs rose 15% in the past two months. We disagree with Bloomberg assessment that this represents a threat to the Energy Transition. It would be, if it were happening in isolation from the rest of the economy, i.e. renewables become more expensive when everything is not. Renewable energy inflation is happening for all the same reasons everything else is getting more expensive and does not change the relative competitive position of renewables.
The Macro Environment (economics & geopolitics)
Our outlook for the global economy, as documented over recent weeks, has been among the more pessimistic ones. In summary, we see inflation driving significant monetary policy tightening globally which will cause an economic recession. Behind the inflation is the supply chain disruption in China associated with their Covid policy and the food, crude oil and natural gas price increases exacerbated European sanctions aimed at Russia due to the war in Ukraine. We see these events contributing to: a global economic downturn to be characterized by an emerging market crisis (they can’t afford energy and food imports and they cannot afford to pay the interest on their debt); political instability; numerous financial crises through out the world hitting sovereign and private debt because everyone everywhere has been binged on debt over the past decade due to historically low (even negative) interest rates. All these events will conspire to affect stock and real estate markets because these two sectors have been artificially inflated the most by the previous period of loose monetary policy.
According to Bloomberg, Noriel “Dr. Doom” Roubini agrees with us. “There are many reasons why we are going to have a severe recession and a severe debt and financial crisis,” he said on Bloomberg TV on Monday, “[and] the idea that this is going to be short and shallow is totally delusional.” Among the reasons Roubini cited was historically high debt ratios in the wake of the pandemic. That differs from the 1970s, he said, when the debt ratio was low despite the combination of stagnant growth and high inflation known as stagflation. But the nation’s debt has ballooned since the financial crisis of 2008, which was followed by low inflation or deflation due to a credit crunch and demand shock. What this means, he says, is that while “In previous recessions, like the last two, we had massive monetary and fiscal easing, this time around we are going into a recession by tightening monetary policy. We have no fiscal space.”
According to Bloomberg, Goldman Sachs sees the Euro Zone economic activity beginning to contract.
According to Nikkei Asia, the IMF now lowered its 2022 economic forecasts for global growth to 3.2% and for emerging and developing Asia to 4.6%, due to global inflation and resulting monetary policy tightening, a Chinese economic downturn, and the continued spillover from Russia's war in Ukraine. About two weeks ago, when the IMF downgraded its growth outlook for the US and the globe, we highlighted that it is usually “behind the curve” during times of change. Hence we predicted and warned that the IMF would release a number of further downgrades over the near term. Today is the first of these downgrade announcements, in what we expect will be a series. Interestingly, the IMF report mentions a “plausible alternative scenario” in which risks materialize and inflation rises further, resulting in a decline of global economic growth to about 2.6 percent and 2.0 percent in 2022 and 2023 respectively. This would put economic growth in the bottom 10 percent of outcomes since 1970.
As to geopolitics, Saudi Crown Prince Mohammed bin Salman is on a trip to Europe. No doubt, energy will feature top of the agenda.
The Electrification of Transport
Indonesia has an ambition to leverage its natural resource wealth by establishing itself as a hub for battery and EV manufacturing. Nikkei Asia reports this is one of the key discussion points during president Jokowi’s current Asia trip to China and Japan. At the same time, however, as we reported yesterday, civil society groups around the world are calling upon battery and EV players not to invest in Indonesia to protest its environmental performance and human rights record. Some players in the battery and EV space will not be affected by such calls, but, if Indonesia wants to attract prestigious global names, it will have to respond to the criticism and improve its performance in these areas.
ESG
BlackRock has responded to the global energy crisis by rearranging its investment priorities. The Financial Times reports the company’s support for US shareholder proposals on environmental and social issues fell by nearly half in this year’s annual meeting season, as the world’s largest money manager voted for just 24 per cent of them. BlackRock is a money management firm after all and it’s investors expect profits.
Over at Forbes, global ESG expert Bob Eccles has released a “A Tutorial On ESG Investing In The Oil And Gas Industry For Mr. Pence And His Friends” It is a good read for all of us ;-)
The Global Energy Crisis
The Financial Times ran an opinion piece on the EU gas deal announced yesterday. At best, the current deal is a prologue to further negotiations, which will be needed to deliver real progress. As we’ve been saying when EU gas deal first made headlines: while there is a need for Europe to reduce gas usage as long as it continues its economic war Russia, a European block-wide deal will be difficult to achieve because member state situations and interest are too diverse and the idea of ‘solidarity’ will last until the first cold winds of winter blow. Bloomberg agrees with our assessment and Andreas Kluth, at Bloomberg, noted the same in “Europe Is Faking Solidarity, and Putin Knows It”
This makes gas shortages the most likely prospect for Europe. We disagree with assessments that say such shortages can still be avoided, which apparently remains the optimistic view in Germany as reported by Reuters while the current sanctions policy vis-à-vis Russia is maintained. Europe’s assessment is based on the assumption that higher gas prices will reduce demand which, in turn, will help to avoid a shortage. This in our view is a totally artificial construct. Yes, technically speaking this would not qualify as a gas shortage. However, due to the prominent role of natural gas in the economy, offering gas at unaffordable prices will have the same effect and consequence as a gas shortage – those activities that rely on access to affordable gas will be curtailed and thereby contribute to an economic crisis. To whit, Reuters reports BASF is readying significant ammonia production cuts in response to the gas supply crunch. Such production cuts will have a negative impact on agriculture.
Bloomberg carried a breakdown of the “turbine saga” and how it is being used by Russia to reduce Nord Stream 1 throughput as an effective means to increase pressure on Germany.
As to crude oil and its derivatives, the Financial Times reports on the US’ continued efforts to move Europe away from its sanction-plans for Russian oil, fearing this will cause the price of liquid fuels to explode. Apparently, negotiations are under way between the US and China, India and other countries that have been buying up discounted oil from Russia after its invasion of Ukraine caused many European customers to turn away. We should highlight that the US has proposed an alternative plan - capping Russian oil prices - is not a feasible alternative to the European sanctions because Russia threatened not to sell oil to any country signing up to the US proposal.
Other
Forbes has an interesting piece on the effort by African country of Gabon to sell carbon credits to help the country protect its rain forests — the largest ever and potentially worth more than $2 billion.
The Financial Times looks at European and US attitudes when it comes to energy usage and how they differ.