Energy, Politics & Money - 30 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 EU ambitions to put in place “IRA-like” legislation. In our view, this is likely to further accelerate development of New Energy technologies. For over a decade, China has had an industrial development policy with subsidies and other forms of support for New Energy and this has enabled major progress in solar and battery tech. Subsidies included in IRA are expected to provide a similar New Energies push in the US including hydrogen and CCUS. If Europe develops legislation similar to the IRA this will spread development in Atlantic with New Energy technologies aggressively supported in all major economic blocks of the world. EPM expects this development to further accelerate adoption of New Energy solutions which will affect fossil fuel demand over the 2030s.
Furthermore, we look at:
BP’s 2023 Energy Outlook, which lowers the overall outlook for oil and gas demand, as the Ukraine War is expected to lower global economic growth and spur on investment in renewable energy
The longer term impact of the Ukraine War on Russia’s ability to sell its energy on the world market
The comments by leading US military personnel on war with China
How increased scrutiny over the growing voluntary carbon market sector is shifting buyers toward carbon removal projects such as direct air capture and biomass with carbon capture and storage, rather than avoidance projects such as deforestation and renewables
General Energy News
Oil prices climbed in early Asia trade on Monday, reports Reuters. Price increases were supported by tensions in the Middle East following a drone attack in Iran on Sunday and China pledging to promote a consumption recovery which would support fuel demand. Brent crude futures rose 54 cents, or 0.6%, to $87.20 per barrel while US West Texas Intermediate crude rose 54 cents, or 0.7%, to $80.22 per barrel.
BP today released its 2023 Energy Outlook, which “considers the recent disruption to global energy supplies and associated impacts on global prices, and explores what impact this could have on the energy transition out to 2050”. The report provides three scenarios, namely Net Zero, Accelerated, and New Momentum. Accelerated accounts for changes that may occur in the global energy sector that may reduce carbon emissions by around 75% by 2050. Net Zero accounts for similar developments, however, accounts for emission reductions of up to 95%. New Momentum accounts for the current trajectory of the world’s energy system. In this scenario, global carbon emissions peak in the late 2020s and by around 2050 are around 30% below 2019 levels. Energy Voice writes that while crude oil continues to play a major role in the global energy system for the next 15-20 years across all three scenarios, it also declines from current levels in all three, with the peak occurring between late 2020s and 2035. Furthermore, BP believes the Ukraine war will slow global economic activity by 2035 by around 3% compared with last year's forecast, due to higher food and energy prices as well as reduced trade activity, writes Reuters. This translates into lower oil and gas demand by 2035, by 5% and 6%, respectively, in the New Momentum scenario that is based on governments’ current energy transition plans. The changes are focused mostly in Europe and Asia which rely heavily on energy imports.
Julian Lee, writing for Bloomberg, notes that while Russia has found alternative markets for its crude oil – mostly India – switching sales of refined products and natural gas will likely take years and come at huge cost. Before the war, Europe soaked up nearly 2.5 million barrels a day of crude, 1 million barrels of refined products, and 155 billion cubic meters a year of natural gas. At EPM we agree with a number of Lee’s assessments. Firstly, the war in Ukraine will eventually come to an end, but relations between Europe and Russia, especially in the area of energy relations, should not be expected to return to the way it was before February 2022. Secondly, there are eager buyers who are willing to take some of what Europe is leaving on the table, most notably China and India. But neither should be expected to take so much that they maneuver themselves into the position Europe found itself in back in February 2022, i.e. dependent on Russia. As to the final outcome, i.e., can Asian markets absorb what Europe will no longer buy from Russia? In the present situation, the answer is a resounding “no”. But after a ceasefire agreement, which will allow some European purchases of Russian energy to return, we are less pessimistic.
Macroeconomics
In clear evidence of the trend toward regionalization of the global economy, Nikkei Asia writes that Sony transferred production of cameras sold in the Japanese, US and European markets to Thailand from China.
Geopolitics
A US Air Force general has issued a memo instructing officers to prepare for a possible military conflict with China over Taiwan in 2025, Nikkei Asia writes. The memo is written by General Mike Minihan and orders all air wing commanders in Air Mobility Command and other Air Force operational commanders to report preparation efforts to the General by the end of February. Minihan currently serves as head of Air Mobility Command, was the deputy commander of US Indo-Pacific Command (from September 2019 to August 2021), and is known to have deep knowledge of the Chinese military. In 2022, Admiral Michael Gilday, Chief of Naval Operations, gave the Atlantic Council in October a potentially earlier timeline: “When we talk about the 2027 window, in my mind that has to be a 2022 window or potentially a 2023 window”. EPM’s view on this is that a possibility of hot war between the US and China should be included in your scenario planning – this is not the unlikely and unthinkable possibility that we all would like it to be. And, in addition, we note a comment made by Ray Dalio who said that some in the US would prefer an early war with China because the US’ technological and military advantage over China is shrinking rapidly. (So it seems better to fight now when the advantage is still there, then later when any advantage has been lost.)
Climate Politics
While on a visit to the US, according to Reuters, Thierry Breton, EU Internal Market Commissioner said the European Union wants a quick deal with the United States to resolve a dispute over US electric vehicle tax credits. He also contends that the EU must pursue its own green technology subsidies in order to keep investments in Europe. EPM’s view is that this is likely to further accelerate development of technologies that can provide alternative energy solutions. China has pursued an industrial development policy supported by subsidies and other forms of support for New Energy for over a decade now and this has enabled major progress solar and battery tech. The subsidies of the IRA were expected to provide a similar New Energies push in the Americas, including hydrogen and CCUS. If Europe develops legislation similar to the IRA, this push will spread across the Atlantic, leaving New Energies aggressively supported in all major economic blocks of the world. Most certainly this will lead to some disappointments, as in companies and technologies failing after receiving significant monetary support. But on the whole we expect this development to accelerate the adoption of New Energy solutions, which will affect fossil fuel demand over the 2030s.
ESG
As scrutiny rises over the growing voluntary carbon market sector, carbon credit buyers are shifting their purchases toward carbon removal projects such as direct air capture and biomass with carbon capture and storage rather than avoidance projects such as deforestation and renewables, writes Energy Intelligence.