Energy, Politics & Money - 30 September 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated just for you!
In this roundup, EPM examines:
G7 developing plans for Russian oil price cap program
Factors that will drive US debate on energy
India’s decision to increase interest rates
Moves in the EV market
Japan’s thoughts on the need for a full cycle ecosystem to recycle plastics
Increased demand for oil and coal
Europe’s continued woes with energy security
And, much more.
General Energy News
G7 PRICE CAP FOR RUSSIAN OIL
Details are slowly emerging about the G7's planned price cap system that will set a maximum price for Russia's oil exports, writes Energy Intelligence. Cargoes sold at the capped price will be allowed to sail on tankers that have Western insurance and finance. The price cap will be set as a flat price for crude oil and refined products, with some product prices set at a premium to crude and some set at a discount to crude. Analysts expect the price cap for Russia's Urals crude grade to be set around $50 per barrel, and once a purchase has been made under the system buyers of Russian products or crude oil will not be allowed to resell them.
SLOW PROGRESS ON PRICE CAP DETAILS
Bloomberg reports, however that progress on additional details of the price cap plan are progressing slower than plan. Consequently, it might not be ready in time to prevent the EU’s sixth sanctions package on Russia, which among other things bans insurance for vessels carrying Russian hydrocarbons, from causing a spike in oil prices.
PRICE CAP ON RUSSIAN OIL - IMPACT ON GLOBAL ENERGY
We have discussed at length here at EPM how the US’s price cap idea is likely to impact the global energy market: countries that accept will lose access to Russian hydrocarbons, reducing the overall supplies available to them and thus raising the prices they will have to pay; while countries that ignore the plan will have Russian volumes directed to them, probably at higher discounts, thus lowering their energy prices and strengthening their competitive position globally. In response, the US, being largely energy independent, is likely to move towards limits to energy exports to protect its domestic industries.
FACTORS DRIVING US ENERGY DEBATE
John Kemp at Reuters discusses some of the facts that we expect will drive public US debate on energy export restrictions. US natural gas production will need to increase significantly to continue growing exports while ensuring fuel remains affordable for domestic power producers, households and industrial users, he highlights.
Macro-Economics
INDIA RAISES REPO RATES
The Reserve Bank of India on Friday raised its benchmark repo rate by 50 basis points to 5.90%, the fourth hike since May, writes Nikkei Asia. RBI governor Shaktikanta Das explained the step was taken primarily for exchange rate considerations. In the last two and a half years the world has witnessed two major shocks -- the COVID-19 pandemic and conflict in Ukraine – that had a “profound impact” on the global economy, he said. “As if that was not enough, now we are in the midst of a third major shock -- a storm arising from aggressive monetary policy actions and even more aggressive communication, especially from advanced country central banks. The necessity of such actions is driven by their domestic considerations, but in a highly integrated global financial system, they inevitably cause negative externalities through spillovers.”.
Geopolitics
RUSSIA ANNEXES UKRAINIAN TERRITORY “FOREVER”
President Vladimir Putin on Friday said that Russia is annexing four occupied regions in Ukraine “forever” and repeated warnings that Moscow will use all available means to defend the territories. At EPM we highlight this annexation is therefore clearly an escalatory act, as it brings these regions in under Russia’s national defense umbrella, which includes its nuclear umbrella.
FINANCIAL SUPPORT FOR US SEMICONDUCTOR INDUSTRY
The US government has earmarked $52 billion as incentives to build up its domestic semiconductor industry. But, Nikkei Asia writes, that’s not all on offer, as US states and local governments also offer subsidies, big tax breaks and high-skilled workforce to incentivize semiconductor companies to move in their direction.
US STRATEGY FOR PACIFIC ISLANDS
The US released its first strategy dedicated to the Pacific islands on Thursday, writes Nikkei Asia, as it looks to strengthen its broader Indo-Pacific strategy and counter China's growing influence in the region. The US will reopen an embassy in the Solomon Islands that had closed in 1993 and develop plans to open two others in Kiribati and Tonga -- all of which have diplomatic relations with Beijing. Washington will also recognize the Cook Islands and Niue as sovereign states, and announced $810 million in additional aid including $600 million dedicated to economic development and climate resilience for the region.
Energy Transition & Technology News
MORE OIL AND COAL DEMAND
If there is one thing the oil and coal industries can agree upon, it's that the solution to the current global energy crisis is more fossil fuels. This was the consistent message from the two industries' biggest annual gatherings in Asia, held this week in Singapore for oil and gas, and last week on the Indonesian resort island of Bali for coal, writes Clyde Russel for Reuters. But, he highlights, there were also policymakers and financiers at the two events, and their perspectives were almost the polar opposite. We at EPM strongly recommend you read the details of this piece, as it covers many of what we at EPM forecast are the likely outcomes of the current situation: recognition that the energy transition has both a shorter-term, during which continued investment in fossil fuels is required, and a longer-term, which should be the focus of energy transition related policy changes.
GLOBAL ENERGY TRANSITION – QATAR OFF THE MARK
As such, we strongly disagree with the assessment of Qatar minister of energy, reported by Reuters, that support for the energy transition is weakening. If anything, we expect a doubling down on the energy transition, especially in Europe, to avoid the current energy crisis from ever happening again.
UAE AND US ENERGY FIRMS FORGE CLOSER TIES
Meanwhile, a delegation of leading US green energy firms will visit the United Arab Emirates in March, to boost cooperation at a time of rising competition from Chinese businesses in the Gulf, according to Bloomberg. The UAE became the first of the Gulf’s oil-exporting states to commit to a net-zero strategy, and is set to host next year’s COP28 climate summit. The country’s ties with the US, meanwhile, are being tested by the inroads made by Chinese companies and technologies.
PLASTICS RECYCLING – FULL CYCLE ECOSYSTEM NEEDED
An opinion piece in Nikkei Asia highlights that plastics recycling requires not only requires the – often discussed – advances in technology, but also development of a sustainable waste management and plastic recycling ecosystem. We at EPM have been looking at this since 2018, when another opinion piece drew our attention to it, and are of the opinion the petrochemical and investment industries are underestimating the importance of the supply chain for recycling. This will result in what can be observed in the biofuels industry, where early movers have cornered the market for the highest quality feedstocks (waste), leaving “late enters” to have to use dedicated agricultural products as feedstock – an approach that is likely to face a strong public blowback.
The Electrification of Transport
TOYOTA - CALIFORNIAN ZERO-EMISSIONS WILL BE TOUGH TO MEET
Toyota Motor President Akio Toyoda said California's new zero-emission requirements, which seek to end sales of new gasoline-only vehicles by 2035, will be “difficult” to meet, writes Nikkei Asia. It’s an opinion that we at EPM feel is hard to disagree with. And, to which we would add, especially for Toyota that is seriously behind the curve on electrification!
CHINA EV CARMAKER SETS EYES ON EUROPE
BYD, the Shenzhen-based rival to Elon Musk’s Tesla, has unveiled plans to take on the European car market, as the electric carmaker embarks on an aggressive global expansion, writes The Financial Times. BYD’s Europe expansion will start in Germany, home to Volkswagen and Mercedes-Benz, and Sweden, before extending to France and the UK later this year.
GEELY SCOOPS UP 8% OF ASTON MARTIN
BYD’s fellow Chinese carmaker Geely, meanwhile, has taken a stake of almost 8 per cent in Aston Martin, reports The Financial Times. The company, which already owns carmakers including Lotus and Volvo, bought into Aston during the recent £654mn rights issue, and will now try to collaborate with the UK group on some technologies.
The Global Energy Crisis
EURO ZONE – ENERGY WINDFALL TAX PLANS
Meanwhile, regarding natural gas, Reuters writes that European Union countries will meet today (Friday) to approve emergency levies on energy firms’ windfall profits, and to launch talks on their next move to tackle Europe’s energy crunch, which is likely to be a natural gas price cap. On the prior, diplomats appear to see eye-to-eye, but as to the latter, opinions are divided.
EUROPE VS. GERMANY’S DEEP POCKETS
The talks are apparently taking place in an atmosphere of animosity, says The Financial Times. Apparently, there is anger among European governments about Germany’s “double ka-boom” plan of euro 200 billion to lower energy costs facing German households and industries, announced yesterday. This plan is to be financed through additional German borrowing, which other EU nations see as “Germany going it alone”.
ENERGY CRISIS – UNDERSCORES NEED FOR BETTER POLICY
The energy crisis is driving has clarified the importance of access to affordable energy, thereby raised the importance attributed to energy policy by governments around the world, which is leading to an increase in market interferences. The latest example comes from Australia, whose government has agreed to provide a A$220 million ($143 million) low-cost loan to privately owned Perdaman to help build a A$4.5 billion urea plant in Western Australia. Reuters writes Perdaman plans to export about half the output of the 2-million-tonne-a-year urea plant to the Asia-Pacific region, Brazil and the United States, while the rest will help cut Australia's dependence on fertiliser imports