Energy, Politics & Money - 30 March 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 look at:
S&P Global’s update of the Brent Dated benchmark starting June this year
The outlook for the US refilling of its SPR – not now, but maybe later this year
Mohammed El Arian’s warning that the banking crisis is likely to have a broader economic impact (something the US Fed fears as well…)
China’s promise that it will open up more for international business
Saudi Arabia’s decision to join the Shanghai Cooperation Organization as a dialogue partner
Europe’s official adoption of the law that bans ICEV sales as of 2035 (which now of course excludes an exception for ICEVs run on e-fuels), and its decision increase its 2030 renewable target to 42.5% of total energy consumption from 32% previously
Europe’s challenges to build out SAF (Synthetic Aviation Fuel) production capacity
Toyota under its new leader, Koji Sato
Honda’s push in electric two-wheelers
General Energy News
Dated Brent, is slowly running out of tradable oil for it to remain reliable. As such, its publisher S&P Global Commodity Insights — better known by traders as Platts — has been forced to make a dramatic overhaul. The future of Dated is now set, reports Bloomberg. From cargoes for June onward, West Texas Intermediate Midland, oil from the Permian will become one of a handful of grades that set the Dated benchmark.
The US could start buying back crude oil for the Strategic Petroleum Reserve late this year, Energy Secretary Jennifer Granholm said according to Reuters. The Biden administration intended to repurchase crude oil for the SPR when prices were at or below about $67-$72 a barrel, after last year's 180 million barrel sale drove the level of the stockpile to its lowest since 1983
Macroeconomics
Mohammed El Arian writing for Bloomberg says that “what happens in the banking sector won’t stay there”. In response to the SVB collapse, US depositors have reallocated part of their funds away from smaller banks and into the largest banks deemed too big to fail, money market funds and even crypto assets such as Bitcoin, he notes. The overall scale and distribution of lending is likely to be affected by this, according to El Aarian, which could become a big issue for local communities and certain regions. This economic contagion, which will play out over time, threatens to increase the challenges facing an economy that is dealing with inflation, a mishandled interest-rate hiking cycle, declines in personal savings, bouts of financial instability and a slowing global economy. It also complicates the longer-term adjustments needed for the green energy transition, the rewiring of supply chains, changing globalization, and the management of debt traps.
The Federal Reserve is aware of the risk that banks could curb lending in response to increased regulatory scrutiny, erosion in deposits or a drop in the value of their equity, Bloomberg also writes. Fed Minneapolis President Neel Kashkari in a March 26 interview on CBS’s Face the Nation said the turmoil “definitely brings us closer” to a recession and noted that officials are closely watching for signs of a widespread credit crunch.
Geopolitics
Amid increasing tensions with the US, China has vowed to introduce new market access measures to deepen trade and investment with the world. According to Nikkei Asia Li Qiang, the Chinese Premier said:
We will roll out new measures on increasing market access, improving the business climate ... to create a better environment for private companies to break new ground and foreign firms to make new investment effectively
Meanwhile, Saudi Arabia has decided to join the Shanghai Cooperation Organization as a dialogue partner, writes Reuters. Formed in 2001 by Russia, China and former Soviet states in Central Asia, the SCO is a political and security union of countries spanning much of Eurasia, including China, India, Pakistan and Russia. Iran also signed documents for full membership last year. At EPM we see this as a natural consequence of the US slowly but steadily losing influence around the world. While most countries should not be expected to turn their back on Washington overnight, meaning that most of the long established geopolitical relations will remain as is, it will lead to more jostling and positioning to strengthen positions vis-à-vis Washington, in order to get better deals from the US. The developments in the Middle East we see as an example of this.
Energy Transition & Technology News
Europe's aviation sector is tasked with boosting synthetic aviation fuel (SAF) use to 10% of all jet fuel by 2030, despite it currently costing up to five times as much. At the same time, developing SAF supply is hard on the continent, writes Reuters. While US firms are benefiting from tax incentives to boost production, Europe has focused on mandating change rather than incentivising it. Oliver Fernandez, Repsol's director for air fuel said
(In Europe) there is a legal instability and a regulatory machinery that is very complex and very discouraging towards seeking new solutions.
Meanwhile, Finland-based Neste, the world's largest SAF producer, says it is expanding its facilities in Europe and elsewhere, but points to challenges including sourcing raw materials.
Climate Politics
European member states have formally approved a new law requiring that all new car and vans sold in Europe must be zero-emission by 2035 after the European Council voted to adopt the proposal March 28, reports S&P Global. Under the regulation, new cars sold in the EU must achieve 55% emission reductions from 2030-34 compared to 2021, while vans must achieve a 50% reduction. A late amendment put forward by Germany and supported by countries including Italy will allow the sale of internal combustion engine (ICE) vehicles that run on e-fuels or net zero fuels after 2035.
European Union negotiators have reached a deal on scaling up renewable energy this decade, and provided a small role for nuclear in one of the last pillars of the bloc’s landmark green plan, Bloomberg reports. Member states agreed to raise the 2030 renewable target to 42.5% of total energy consumption, from 32%. Countries like France will be allowed to reduce their green hydrogen targets in industry by a fifth by 2030 if they mainly use nuclear power — rather than fossil fuels — for producing the rest of their hydrogen and stay on track to meet their overall renewable goals.
The UK, meanwhile, Is sticking with its “path” for a transition to electric vehicles, which would phase out hybrid vehicles from 2035 and has no exemption for e-fuels. UK energy secretary Grant Shapps told reporters, according to the Financial Times.
(Our) position remains the same. We’ve always been more forward-leaning on this stuff than the EU.
Bloomberg’s editors say that while greater public support for green investment makes sense for the US and EU alike, such efforts should be well-designed and, above all, cooperative. An uncoordinated subsidy race will prove needlessly expensive and thus less effective.
On this topic, the Financial Times writes that a long-awaited deal on how EU battery makers could access US subsidies is finally close, as Washington has offered to make five minerals used in batteries eligible for subsidies under its green-tech promoting Inflation Reduction Act if they are mined or processed in the EU. Earlier, Japan signed an agreement with the US to drop tariffs on the same five minerals.
The Electrification of Transport
Nikkei Asia has a deepdive look at Toyota under its new leader, Koji Sato. “We will accelerate the development of BEVs with a different approach than before”, he declared during a February news conference. But the company's vision to continue providing a variety of choices to customers, which includes not just BEVs but also gasoline cars, hybrids and even hydrogen-fueled vehicles, will "absolutely not waver at all" under his reign, he also said, because he believes Toyota has the ability to everything all at once. At EPM we believe this to be highly unlikely. Toyota will have to make choices as no organization can manage everything all at once. The longer it delays its decision, the further behind it falls in the BEV era that – so much is essentially certain at present – will be the most important growth area in automotive.
Honda Motor will begin sales of electric two-wheelers in India, writes Nikkei Asia. Honda Motorcycle & Scooter India plans to will start at an annual capacity of around 600,000 units and ramp this up based on market demand, reaching an annual production capacity of 1 million electric two-wheelers by 2030. Worldwide, Honda Motor aims to grow annual sales of electric two-wheelers to 3.5 million units in 2030.