Energy, Politics & Money - 29 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money view just for you!
Welcome to the Energy, Politics & Money newsfeed of Monday 29 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
General Energy News
Crude Oil
Julian Lee of Bloomberg is not impressed by comments made by the Saudi Energy Minister, Prince Abdulaziz Bin Salman Al Saud last week; he said OPEC+ might reduce production to support futures prices and bring them in line with the physical realities in the crude market. He agrees with our assessment from last week, which was that rationally, a cut in physical production to manage futures prices does not make sense. It could even be detrimental as, by the prince’s own admission, the physical market is already tight. But since the warning influences the behavior of speculators, it can do the trick nevertheless. And since the prince’s comments pushed crude up by $4 per barrel, clearly it did.
Natural Gas and LNG
As to natural gas, Amy Myers Jaffe writing for Energy Intelligence says natural gas markets are undergoing a radical reordering that will ripple for years to come. The changes, she says, prompted by suspension of a percentage of Gazprom’s natural gas shipments to Europe in the wake of the Ukrainian war, highlight just how global natural gas has become as a commodity and how deep the supply hole for LNG may really be. The crisis seems to imply, too, that natural gas is about to see a renewed heyday. But, she cautions, with accelerating renewables also vying to replace gas, the outlook beyond next year could be worse than eye-watering spot LNG prices might imply.
Macro Environment (economics & geopolitics)
International Banking
The heads of the Bank of England, Swiss National Bank, Bank of Japan, Bank of Korea and several European Central Bank policy makers joined the US Fed on its annual retreat in Jackson Hole. The messaging coming out is one of unequivocal determination to raise interest rates significantly over coming months Bloomberg reports. US Fed Chief Powel spoke of the importance at looking at the “totality of data” available, rather than cherry picking positive pieces of information, thereby signaling an intent to raise rates by another 0.50 to 0.75% in September.
European Central Bank
European Central Bank policymakers agree and made the case for a large interest rate hike next month as inflation remains uncomfortably high and they fear the public may lose trust in the bank’s inflation-fighting credentials if they don’t according to Reuters. The ECB raised rates by 50 basis points to zero last month and a similar or even bigger move is now expected on September 8. According to The Financial Times, the ECB recognizes this will demand “sacrifices” from the general public – which we at EPM would argue, though accurate, is also ironic, as it effectively means the ECB wants general public to bear the pain of higher interest rates in order to be saved the pain of higher inflation…
South Korea Central Bank
In an interview with Reuters the head of South Korea’s Central Bank – also present at the gathering – explained the dilemma South Korea faces with monetary policy. South Korea too feels it needs to fight inflation by slowing down the economy through a tightening of monetary policy. But, it also needs to keep an eye on the US dollar - Korean won exchange rate which might force a level of monetary tightening that exceeds what is required to fight inflation. This highlights, that for many countries around the world, the degree to which central banks will raise their rates is indirectly set by the Fed.
China - Real Estate
Over in China the local real estate situation is not improving. Mortgage rates were already cut, as we reported on last week, but demand for new housing remains at rock bottom. Nikkei Asia reports that profit warnings by Chinese property developers are now essentially daily, with many falling into the red. The real estate issue has also begun to spill over into the financial sector, with banks starting to report impairment losses associated with the real estate sector.
Views on the Global Recession
Project Syndicate is running an opinion piece by Jim O’Neill, formerly of Goldman Sachs, arguing the world might not be in for a global recession over the shorter-term. As you know, a global recession is our base case scenario. The elevated prices consumers are facing everywhere for everything -- in part due to the global energy crisis and in part due to covid related supply chain disruptions and in part due to almost two decades of loose monetary policy – coupled with tightening monetary policy the world over will negatively impact consumption and investment.
A lack of access to energy in certain parts of the world – Germany, Italy, wider Europe, Pakistan, Bangladesh, Sri Lanka, and the wider developing world – will further worsen the situation. In our view, the piece doesn’t provide solid arguments against our thesis of “doom and gloom on the horizon”. It provides arguments that possibly work well in the ivory towers of economic theoreticians, but that are irrelevant in real world economics.
For example, O’Neill argues that if energy prices remain flat at current levels, next year’s inflation will be much lower than it has been this year. Of course, this is mathematically correct. But, it ignores the fact that many economies cannot afford to pay $100 for a barrel of oil, or $500 for the equivalent energy amount of natural gas. These prices therefore mean either a crowding out of all kinds of other expenditures, or a reduction in energy use. In the real world, both mean severe hardship for households and businesses.
Another example provided by O’Neill that argues against the recession thesis, is strong employment growth in the United States. Again, a wonderful statistic of great use for technocratic debates in the ivory towers inhabited by theoretical economists, but largely irrelevant for the current real-world economic situation where inflation is biting into people budgets and forcing them to cut back on discretionary spending. In conclusion, according to the definitions and indicators used by theoretical economists, everything might just turn out to be fine over the coming 12 to 18 months. But if you are active in the real world, we remain of the opinion you had better prepare for the worst.
Geopolitics
China European Relations
As to geopolitics, EU-China relations are about to get bumpier, writes Politico, as Brussels will present its forced labor ban in early September — a move that will target products made by persecuted Uyghur Muslims in China. We at EPM advise Europe that if it is really concerned about its trade relation with China, it should reconsider its position of “unequivocal support for US geopolitics”, as this will most certainly get Europe into trouble with China over Taiwan, just as it got Europe into trouble with Russia over Ukraine, the consequences of which are by now well know and understood.
Arctic Region Relations
Nikkei Asia reports the US intends to name an ambassador-at-large for the Arctic. Russia, an Arctic country, has reopened hundreds of Soviet-era military sites in the region, according to NATO. China, which describes itself as a “near-Arctic” state, also has ambitions in the region and has said it intended to build a “Polar Silk Road” to leverage the new shipping routes opening up as the ice caps melt under global warming. America clearly intends to counterbalance these developments (with Canada remaining oblivious to the threat and incapable of credibly supporting the US).
Energy Transition & Technology News
Activists on the Move
The Financial Times writes businesses face growing legal threats from activists looking to challenge sustainability claims deemed to be disingenuous or untrue and decarbonisation targets considered too weak to protect shareholders from future climate-related losses. This is pushing corporate insurance costs even higher. At EPM we see this as the fourth pillar under the global sustainability trend. The first is consumer sentiment, which favors sustainable more solutions. The second is government policy, which is titling to regulations that demand more sustainable operations and solutions. The third is investors, who aren’t stupid and know that because of the prior, sustainable companies are likely to do better going forward. The fourth is the threat of legal action, usually by minorities of highly committed and well organized pressure groups.
Reducing Carbon from Steel Production
Because of the above, Korea Shipbuilding & Offshore Engineering – one of the world’s largest shipbuilders – expects orders for methanol-powered ships to surge in the coming decades writes The Financial Times. The company said it expects LNG burning ships to remain the mainstream for the next two decades, but that it will also see a sharp uptick in methanol-fueled ship orders over the coming decade by companies pushing decarbonization beyond what the “bunker fuel to LNG switch” provides. LNG is expected to remain the mainstream due to limitations on the supply of green ammonia coming available and costs.
Japanese Steelmakers
Steelmakers globally are under pressure from clients who seek to reduce carbon emissions in their supply chain. Looking to the future, Japan's second largest steelmaker JFE Steel will switch one of its furnaces to electric around 2028 writes Nikkei Asia. Electric furnaces are among the few ways through which the steel industry can decarbonize, with the other often discussed route being replacing natural gas for heat production with hydrogen.
European Steelmakers
JFE is not the first to take the electric furnace route, UK-based steelmaker Liberty Steel Group had announced earlier this year that it will introduce two electric furnaces in a steel mill in the Czech Republic with an investment of around $350 million. The furnaces are expected to launch as early as 2025, with the company estimating that the mill will be able to reduce more than 80% of its carbon emissions by 2027. Sweden-based steel producer SSAB also announced plans to invest around $4.75 billion to transform all its production in the Nordic region to electric arc furnaces powered by fossil-free energy over the next ten years, to eliminate its CO2 emissions by 2030.Japanese steelmakers have been following these moves over in Europe. Nippon Steel aims to build an electric furnace by 2030, while the third largest Japanese steelmaker Kobe Steel is considering a similar project.
Indian Energy Companies
Indian oil and gas company GAIL intends to achieve a 100% reduction in Scope 1 and Scope 2 Emissions, and a 35% reduction in Scope 3 emissions by 2040, the company announced last Friday. To achieve the objective of reducing its carbon footprint, GAIL is venturing into green hydrogen production and aims to set up 3 gigawatts of renewable energy capacity by 2030, Reuters reports. Interestingly, this announcement means that India’s oil and gas industry is now closer aligned with its competitors in Europe than it is with those in the US. Reliance Industries, operator of the world's biggest refining complex, aims to achieve net zero by 2035, while state-owned Bharat Petroleum and Hindustan Petroleum have set a 2040 goal. India Oil Corporation, the country's top refiner, aims to achieve net zero Scope 1 and 2 emissions by 2046.
Climate Politics
Africa and European Relations
A few days ago we reviewed Europe’s dealing with Africa on energy. We said Europe is quite hypocritical. After COP26 in Glasgow, Europe instructed Africa not to develop its fossil fuels potential; but today, Africa is offered financing by the same Europe if it develops this potential to export these fossil fuels to Europe. At the United Nations Africa Adaptation Summit scheduled for September 2022 in Rotterdam, Europe is again showing behavior that opens it up for the criticism reports Politico. The objective of the summit is to discuss the ways through which the developing world will deliver on its commitment from COP26 to provide additional financial support for climate-proofing projects in poorer countries. The stated aim was to deliver $40 billion per year by 2025. Apparently, Dutch Prime Minister Mark Rutte will be the only European leader planning to attend in person (only because he resides in the Netherlands).
The Electrification of Transport
California Phasing out Gasoline Burners
On Thursday, the US state of California decided to phase out ICEV sales by 2035. The California decision goes into effect for the 2026 model year, when automakers are required to have 35% of new sales be of zero-emission vehicles. After 2026, California will require automakers to make zero-emission vehicles 68% of new sales for the 2030 model year, then 100% for 2035 models. The types of automobiles that make the grade include electric vehicles, fuel-cell vehicles and plug-in hybrids with all-electric driving ranges of 80 kilometers or more.
Trouble for Japan in California
Nikkei Asia reports this will create a significant problem for Japanese automakers. California accounts for 12% of US auto sales, and the Japanese – who are significantly behind in the EV space as they have focused on FCEV which have not and are unlikely to take off – face significant penalties on their ICEV sales in the state of they don’t meet the new regulatory requirement: $20,000 for each vehicle sold over the cap. This will cause significant public debate as to whether California is doing the right or smart things here which may result the requirements being “toned down”. Moreover, as reported by Reuters, the Biden administration must approve California’s the plan before it can be executed. This news should serve as a wake-up call for any automaker not yet fully on board with the electrification of transport – as well as energy companies that focus on the sales of fuels for road transport.
Europe and Green Heavy Trucking
Bloomberg interviewed Christian Levin, VW’s Head of Trucks (and therefore heads Traton and Scania truck manufacturers). Levin sees the heavy-truck sector going clearly moving toward battery-electric as the dominant technology while using alternative fuel sources. He also says VW has already reviewed the economics to figure out when diesel heavy duty vehicles become more expensive than the electric alternatives. It has already happened for city buses and happening right now for smaller distribution vehicles. For heavy vehicles, Levin believes it will happen on a large scale in developed markets somewhere in 2025-2030, and first in Europe. He cautions that this requires a price on carbon-dioxide emissions, a functioning charging network, and access to sufficient supplies of green electricity.
The Global Energy Crisis
Asia
After Sri Lanka, Pakistan and Bangladesh, and now Tunisia, the starting point of the Arab Spring in 2011. More information is coming out as to how people’s lives are affected by the global energy crisis. Reuters reports Tunisian shops have begun rationing goods including cooking oil, sugar and butter, while long queues have hit petrol stations amid a fuel shortage.
The US
Reuters reports the Biden administration has threatened US refineries with market intervention if they do not shift away from capturing elevated prices for products in export markets instead of increasing domestic inventories. Of course, US refineries are pushing back, but the Biden administration is adamant this is necessary to prevent shortages of product during hurricane season. If the Biden administration gets its way, this will mean an additional energy worry for in particular Europe.
Europe
In Germany, a focus on the good news, namely that gas storage facilities are filling up faster than planned, reports Reuters. That is good news as an uncontrolled shutdown of the continent due to acute energy shortages would have apocalyptic consequences. Left undiscussed in the report, however, are the prices paid for the gas directed to strategic storage and what these prices will mean for European society and industry. We repeat our mantra that it is not only acute energy shortages that Europe should worry about, it also needs to worry about prices that are being charged to households and companies for available energy. They are already at record highs. Prices are likely to go higher as we approach and then enter winter. Which will leave many households and companies with a purely theoretical access to energy because prices will make it practically unaffordable.
Other
S&P Global has an interview with the “Father of Carbon Trading”, Dr. Richard Sandor, on the evolution of carbon markets. As one would expect, he is very optimistic about the potential of carbon trading to grow over coming years, but he has a number of good points to back up his view.