Energy Politics & Money - 28 April 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we take a closer look at Germany decision to join the US economic war against China, through its decision to restrict exports of chemicals to China critical for semiconductor manufacturing.
At EPM we note that from an economic sense, this move makes no sense for Germany. It was energy-dependent on Russia, and built a critical relationship with China for its economy, with German companies investing tens of billions in the latter country over recent years, investments which now come at risk as Germany launches this campaign of economic warfare.
German support for sanctions on Russian energy, and now for semiconductor sanctions against China, make no sense from a purely economic perspective, and therefore explain that it must be under US pressure to do so nevertheless – that is, to sacrifice its own economic interests for the geo-strategic interests of the US. In the new era of geopolitics, this is what investors need to be aware of.
In a battle between superpowers, dependent countries will be forced to act against their own interest, meaning that future returns will not always be as “fundamentals” predict – if your fundamentals analysis does not include geopolitics, that is. We launched EPM to help you factor this broader set of variables into you thinking and analysis.
Furthermore, we look at:
Continued weakness in crude oil prices, due to economic recession fears; and Valero’s contrarian view on the shorter-term demand outlook
TotalEnergies’ sale of its carbon-heavy Canadian oil sands operations to Suncor Energy
Turkey’s foray into nuclear energy – thanks to Russia
The imminent collapse of First Republic Bank in the US
Huawei’s successes in dealing with the US sanctions it is exposed to, which could have broader significance as a possible harbinger for the future of China
The view that energy transition is at risk of failing, as too many of the current incentives and policies fail to take seriously the sheer size of the current fossil fuel energy system
The Tesla Semi truck price tag of $250,000
BP’s shareholder meeting, where the company chose not to allow shareholders to vote on the recent change to its Net Zero targets
General Energy News
Oil prices were little changed on Friday but are set for their second weekly drop, writes Reuters, as fears for a global recession are now front-and-center of traders’ minds. Brent is set to decline this week by 3.8% and is down 9.1% in the past two weeks. WTI is on a path to drop 3.8% this week, taking its two-week decline to 9.4%. Brent crude futures for June were trading at $78.53 a barrel, up 16 cents, or 0.2%, as of 0156 GMT. U.S. West Texas Intermediate (WTI) crude was up 23 cents, or 0.3%, at $74.99 a barrel.
US refiner and marketer Valero, however, is optimistic about short term demand. It sees currently strong demand for gasoline, diesel and jet fuel, and it sees it increasing further ahead of the peak summer travel season amid tighter supply and low inventories, writes S&P Global.
TotalEnergies has accepted an offer to sell its carbon-heavy Canadian oil sands operations to Suncor Energy for $4.1 billion, with potential additional payments of up to $450 million, writes Reuters. Analysts said its results were positive, as was the sale of carbon intensive oil sands given investors' focus on lower carbon energy.
Iran seized a Marshall Islands-flagged oil tanker in the Gulf of Oman, Nikkei Asia writes, after it collided with an Iranian boat, injuring several crewmen. The U.S. Navy identified the vessel as the Advantage Sweet. According to Refinitiv ship-tracking data, it is a Suezmax crude tanker, capable of hauling a million barrels of oil, that had been chartered by oil major Chevron and had last docked in Kuwait. The vessel's destination was listed as the U.S. Gulf of Mexico port of Houston. “Iran’s actions are contrary to international law and disruptive to regional security and stability,” the US said, according to Bloomberg.
Turkish president Erdogan and Russian president Putin took part virtually in a ceremony inaugurating Turkey's first nuclear power plant, the Akkuyu, which on Thursday saw the first loading of nuclear fuel into the first power unit, writes Reuters. The $20 billion, 4,800 megawatt (MW), Russian constructed project at Akkuyu entails the construction of four reactors. "We plan to complete the physical launch (of the plant) next year... in order to be able to produce electricity on a steady basis from 2025, as we agreed," Andrei Likhachev, head of Rosatom, said in Mersin before the ceremony. Erdogan thanked Putin for his support on Akkuyu, adding: "We will take steps to build a second and a third nuclear power plant in Turkey as soon as possible."
Macroeconomics
As EPM foresaw it would, First Republic has continued to lose deposits this week, which, together with the 60% decline in its share price this last week, has left the bank on the verge of collapse. The White House is now monitoring the situation, Reuters writes, and is standing ready to take action if needed. At EPM we do not expect a public bail out of First Republic, considering the public resistance this is likely to trigger. We said earlier that most likely according to us is an(other) intervention by the US big banks, financed by the Fed.
The Financial Times says a private bail out is exactly what is being worked on right now. JPMorgan, which has been acting as First Republic’s banker and is the largest US lender, is involved in the conversations, but other large institutions are also likely to participate in some way, it says.
Geopolitics
Germany is in talks to limit the export of chemicals to China used to manufacture semiconductors, writes Bloomberg. The proposal is part of a package of measures that Chancellor Olaf Scholz’s government is discussing that would cut off China’s access to goods and services needed for the production of advanced semiconductors. The step will limit German companies like Merck KGaA and BASF SE from selling some of their semiconductor chemicals to China. At EPM we note that from an economic sense, this move makes no sense for Germany. It was energy-dependent on Russia, and built a critical relationship with China for its economy, with German companies investing tens of billions in the latter country over recent years, investments which now come at risk as Germany launches this campaign of economic warfare. This German move therefore explains that it must be under US pressure to do so, to sacrifice its own economic interests for the geostrategic interests of the US. In the new era of geopolitics, this is what investors need to be aware of. In a battle between superpowers, dependent countries will be forced to act against their own interest, meaning that future returns will not always be as “fundamentals” predict – if your fundamentals analysis does not include geopolitics, that is.
Bloomberg also carries a look at the company that is at the epicenter of a US-China chip war, ASML from the Netherlands. It practically owns the market for a critical piece of equipment needed to produce the brains of everything that makes modern life possible — from cars and smartphones to computers, microwaves and airplanes. With the company’s high-end machines churning out chips that can also go into state-of-the-art weapons and artificial intelligence devices, ASML is effectively being treated as critical infrastructure for US national security and has become a target of industrial espionage for China.
An opinion piece in Nikkei Asia argues that Huawei has proven resilient in the face of US sanctions, and has broader significance as a possible harbinger for the future of China, even as the U.S. increasingly widens the scope of its restrictions on normal trade and exchanges. Crucial to Huawei's survival so far was the early recognition of the possible threat it faced as a target of American rage, it says. This led it to develop appropriate contingency plans such as identifying alternative suppliers, redesigning products so they were devoid of American components, preparing as much as possible to be more self-sufficient, and developing new businesses and markets. These strategies have borne fruit, it says, as revenues from the company rose by 0.9% to 642.3 billion yuan ($93.1 billion), largely due to its new businesses division growing 30%. Ironically then, it argues, American efforts to strangle Huawei may lead to it becoming even more central to the world's digital future as it leverages its capabilities to take leading positions in new markets such as artificial intelligence, cloud computing and autonomous vehicles while clawing back lost ground in smartphones and networking equipment. China as a country is following the same approach, the author says, and it could well achieve the same results.
Energy Transition & Technology News
The energy transition is at risk of failing says Energy Aspects, according to the Financial Times, as too many of the current incentives and policies are poorly designed because they fail to take seriously the sheer size of the current fossil fuel energy system they are seeking to replace. It highlights the issue with biofuels, which EPM has articulated previously as well, and which is that there simply isn’t sufficient feedstock for biofuels to replace conventional liquid fuels – unless, that is, if you support massive deforestation for agriculture of additional plant based oils.
The Electrification of Transport
During the Tesla Semi truck unveiling in late 2017, Tesla estimated that the truck’s 300-mile version would cost $150,000 and its 500-mile variant would cost $180,000. Teslarati writes, it seems the Semi’s current iteration costs a bit more than that. A delivery to PepsiCo is said to be at a $250,000 price tag, about twice the price of a conventional diesel-powered Class 8 truck. Some analysts argue this is a steal, due to the significantly lower operating cost of electric vehicles. Total costs of operation of the Semi could be less than half versus a diesel truck over 700,000 miles.
Other
Battle at BP’s shareholder meeting yesterday, writes the Financial Times. In February, BP scaled back its commitment to cut oil and gas output by 40 per cent by 2030 compared with 2019 levels and is now targeting a 25 per cent reduction. As a result, it is now aiming for a fall of 20 and 30 per cent in “scope 3” emissions by 2030, compared with its previous goal of a 35 to 40 per cent fall. But, BP made a strategic decision to not ballot shareholders on this change, unlike last year when it did. Provisional voting results from the meeting indicated that 17 per cent of shareholders backed the Follow This resolution for greater strategic alignment with the Paris agreement — up from 15 per cent last year but down from as high as 21 per cent in 2021.