Energy, Politics & Money - 31 July 2023
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we take a closer look at the geopolitics surrounding the war in Ukraine. Over the past few days, Russia courted Africa at the Russia – Africa Summit held in Sint Petersburg. Although attendance this year was lower than last year – reflecting the geopolitical pressures African countries are under to pick sides – the narrative coming out of the African countries in attendance indicates that they do not want to take sides, because of their economic dependencies. They recognize that whichever side they would pick, they would suffer serious economic consequences.
EPM noted with interest, therefore, the Saudi Arabian initiative to bring the developing world together in August for a conversation on Ukraine. We see this as support for an American push to bring the developing world firmly into its camp, against Russia. We believe this because the Saudi’s announced their idea a day after they were visited by the US National Security Advisor, and chose to invite the US and its allies in the developed world, but did not extend an invitation to Russia.
All this indicates, in EPM’s view, that both sides in the Ukraine War, that is Russia and the US, continue to maintain “maximalist demands”. Russia wants to keep what it has occupied, while the US wants to see a total defeat of Russia and its complete withdrawal from the Ukraine. This leaves no room for talks based on compromise, and thus makes a continuation of the current conflict – WW1 style trench warfare – the most likely scenario for the medium term.
One may even wish it will be, as most other possible scenarios in our view would be worse for the world. If the US were to succeed in bringing Russia to its knees on the battlefields in Ukraine, it is likely to launch a nuclear war, Dmitry Medvedev, former Russian President and currently deputy chairman of Russia's Security Council, said on Sunday. On the other hand, if Russia were to be able to defeat the current Ukrainian counteroffensive, the US-led alliance is likely to supply Ukraine more western weapons, such as F-16s, which would increase the risk of the war becoming regional by dragging in Poland (from where these F-16s would have to be maintained, provisioned and launched for sorties in Ukraine), and possibly the Baltics and Moldova.
The well being of the world requires a sincere desire by both sides in the Ukraine War to end the fighting first, and to find a compromise solution thereafter. This desire does not currently exist, and as such we believe your outlooks should assume continuation of the war in Ukraine, with all the negative impacts that has for the European economy, as well as the economies of the developing world.
Furthermore, we look at:
Peak gasoline demand in China, which is at hand as electric vehicle sales soar
Why EPM believes India will underperform versus expectation, and potential
The next steps in the US’ preparations for war with China, through upgrading its military presence in Australia and establishing in the country a defense industry on the basis of US technology
The view of the former chairman of the US Nuclear Regulatory Commission on Small Modular Reactors (SMRs)
France’s turn to subsidies to protect its carmakers against the coming wave of Chinese EVs of superior quality
The need to overhaul Europe’s energy security policy
The significant decline in shareholder support for proxy resolutions on topics including climate change over in the US
General Energy News
Oil ended last week up again, the fifth week in a row now. Saudi and Russian production and export cuts have left investors optimistic that demand growth will keep prices buoyant over coming months, writes Reuters. Both oil benchmarks gained nearly 5% for the week. Brent settled at $84.99 a barrel, while WTI crude ended the week at $80.58 a barrel.
China's demand for petrol / gasoline is likely to peak as early as next year as electric vehicle sales soar, several analysts say, bringing forward an energy transition milestone, writes Reuters. The International Energy Agency (IEA) and consultancy Rystad Energy have brought forward forecasts of China's peak gasoline demand by about a year to 2024, while Chinese state majors PetroChina and Sinopec see it in 2025. The expectation is that the earlier halt in gasoline demand growth in the world's No. 2 oil consumer will push Chinese refiners to ramp up exports of the motor fuel to Asia (if the Chinese government allows this EPM adds, which we believe is doubtful) and spur them to make more naphtha, diesel and jet fuel, crimping refining margins in the region.
Macroeconomics
On the topic of India, where as you know the EPM view is that the country is most likely to under perform versus the common expectation due to the weakness of its institutions, Project Syndicate has a new opinion piece. The early 1980s marked a pivotal historical moment, as both China and India began liberalizing and opening up their economies, it notes. Both countries elicited projections of “revolution” and “miracle.” But while China grew rapidly, to become an economic superpower, India lagged. It argues that projections of India as the next economic miracle are little more than hype. Underlying the view is the assumption that it is investment in human capital – education and health – that drives economic development.
In this area, China moved up the ladder consistently since the 1980s, today reaching a level similar to the much richer (in per capita terms) Chile and Slovakia, while India remains at a level below Nepal and Kenya. This leaves China better prepared for the future. Seven Chinese universities are ranked among the world’s top 100, with Tsinghua and Peking among the top 20. Tsinghua is considered the world’s leading university for computer science, while Peking is ranked ninth. Likewise, nine Chinese universities are among the top 50 globally in mathematics. By contrast, no Indian university, including the celebrated Indian Institutes of Technology, is ranked among the world’s top 100. EPM’s response to this view is that it mistakes the symptom for the disease. Development, in our view, results from competent institutions led by a visionary government. Such foundations drive human capital development, because of the vital importance of human capital to supporting development. But human capital development will not result without this foundation. This is why we remain of the opinion that India will underperform versus expectation, and potential, because its institutions remain weak (and dominated by powerful business interests).
Geopolitics
According to Responsible Statecraft, the Russia – Africa summit in Sint Petersburg last week was a disappointment. The meeting drew only 17 heads of state, a sharp drop from the 43 African leaders who attended the 2019 version. The African leaders primary concern was the impact of the war in Ukraine on wheat supplies to Africa, and general wheat prices. To assuage these concerns, Putin offered free grain to 6 African nations – Burkina Faso, Zimbabwe, Mali, Somalia, Central African Republic and Eritrea, writes Reuters. But the offered 25-50,000 tonnes each will hardly have an impact and not suffice to assuage African concerns.
During the summit, African leaders issued a direct appeal to Russian President Vladimir Putin to end his war against Ukraine, writes Politico. The sentiment was echoed by the foreign minister of Chad Moussa Faki Mahamat, the Congolese president Denis Sassou Nguesso, Senegal’s president Macky Sall and South African president Cyril Ramaphosa. In June the latter presented the so-called African peace initiative, which includes a 10-point plan to end the war, but that is even more high-level and weak on practical details than the earlier Chinese proposal. In the EPM view, the call by African leaders is less of a challenge to Putin than it appears to be. What is telling, in our view, is that African leaders in attendance did not challenge the Russian narrative regarding the war in Ukraine. They just called for a negotiated end to fighting, to enable a return to economic normality. (In fact, according to Reuters, Comoros President Azali Assoumani, chair of the African Union, explicitly supported Russia’s position, saying its complaints should be listened to: "I shouldn't say that Russia is right or wrong. It acted for its own reasons; now we need to hear them in order to try to move forward.") We believe Putin probably equally wants this to happen as soon as possible – just as long as the ceasefire between Russia and Ukraine is on the basis of the current lines of fighting.
Putin confirmed EPM’s above assessment that Russia would relish an end to the war in Ukraine, on the condition that this is based on the current lines of fighting, in a press conference after the summit. Reuters writes that on t e question of starting peace talks, Putin said, "We did not reject them... In order for this process to begin, there needs to be agreement on both sides."
On the subject of peace talks, the Wall Street Journal reports that Saudi Arabia is set to host talks among Western countries, Ukraine and key developing countries, including India and Brazil, early next month. According to diplomats involved in the discussion, the meeting would bring senior officials from up to 30 countries to Jeddah on Aug 5 and 6. The summit wouldn’t include Russia, however. The EPM perspective is that this diplomatic effort does not represent peace talks. Rather, it is an effort to bring the developing world, which so far has shunned picking sides in the Ukraine War, firmly in the American camp, in order to increase pressure on Russia. We note the Saudi’s announced their summit plan just a day after they were visited by the US National Security Advisor Jake Sullivan, as reported by the White House itself. This is important as it explains Saudi Arabia’s alignment in the world of geopolitics. Contrary to the speculations of many, it has not ended its long time relation with the US.
All this indicates, in the EPM view, that both sides in the Ukraine War, that is Russia and the US, continue to maintain “maximalist demands”. Russia wants to keep what it has occupied, while the US wants to see a total defeat of Russia and its complete retreat in Ukraine. This leaves no room for talks on compromise. The seriousness of this situation should not be underestimated. Dmitry Medvedev, former Russian President and currently deputy chairman of Russia's Security Council, said on Sunday that Moscow would have used a nuclear weapon if Kyiv's ongoing counter-offensive had been a success, Reuters reports.
Over in Asia, the U.S. and Australia agreed to upgrade two additional air bases in northern Australia, and to step up cooperation on weapons production and maintenance, writes Nikkei Asia. According to a joint statement issued after the talks, the U.S. and Australia will add Scherger and Curtin Royal Australian Air Force bases to a list of facilities slated for an infrastructure upgrade. Washington and Canberra also vowed to move forward with infrastructure development at air bases in Darwin and Tindal. These bases are seen as strategically important in the event of a military clash in the Western Pacific. In a crisis, U.S. aircraft could refuel and take on supplies such as ammunition, food and medical equipment at these bases. The U.S. will also step up support for Australia's efforts to develop precision-guided munitions production and maintenance capabilities.
The initial goal is to co-produce Guided Multiple Launch Rocket Systems (GMLRS) by 2025. The U.S. will also transfer technical data on the 155-millimeter artillery shell and facilitate Australian production of the ammunition.
Energy Transition & Technology News
The former chairman of the US Nuclear Regulatory Commission, Allison Macfarlane, shared some outspoken views on Small Modular Reactors in an article for IAI News. They are a red herring, she says, with philosophy, rather than science, driving the world’s current fixation. Behind the hype there is very little concrete technology to justify it, in her view. SMR technology remains largely in the design phase. Previous attempts at building nuclear reactors in modular manner have largely failed: Westinghouse’s AP-1000 South Carolina was abandoned in 2017, after an investment of US$9 billion, and while its two units in Georgia were to start in 2016/2017 for a price of US$14 billion, only one unit has so far started with total cost now being over US$30 billion. Under the best of assumptions, SMRs will remain more expensive than renewables. The main reason money is nevertheless flowing into the technology, is because investors think they can make money through IPOs before all the above problems burst the bubble, is her final conclusion.
The Electrification of Transport
France’s new automotive subsidies are “paving the way” for Europe’s car industry to withstand the threat of an influx of cheaper Chinese electric vehicle imports, says French finance minister Bruno Le Maire according to the Financial Times. The French government will only pay subsidies for new electric vehicles based on the emissions of their producers. That will hit manufacturers from China, where the industry relies on electricity largely powered by coal. The EPM view on this is, firstly, that it confirms the European automobile industry is very, very worried about the coming competition from China – as they should be in our view as in the EV segment the Chinese EVs almost comprehensively outperform the Europeans’. Second, that what France is doing is disguising state support as industrial policy / environmental policy. The comment by Le Maire set out quite clearly the real objective is protection of French industry, after all. It is blatant protectionism. Thirdly, as China leads the world in the adoption of renewables, and Chinese EV companies will not be sitting still, we expect that the French excuse for giving only European carmakers a subsidy benefit but not Chinese carmakers will not be supported by facts for very long.
The Global Energy Crisis
European Union countries are collectively facing a structural fossil fuel energy deficit. The continent’s oil, gas, and coal resources are minimal, and building new dependencies is a growing geopolitical challenge—the purchase of fuels cost the EU €720 billion last year. As such, Europe needs an overhaul of its energy security policy, writes Euractiv. For decades, the European Union’s economy has thrived on its own and imported fossil fuels from, among others, Russia. The overhaul needs to increase energy efficiency and focus more on renewables, it says. Which to us at EPM reads a lot like a continuation of the fantasy world approach Europe has had to energy over the past decades.
Other
Shareholder support for proxy resolutions on topics including climate change and workforce diversity dropped significantly, writes Reuters. Halfway through the shareholder annual meetings of Russell 3000 companies, average support for voted resolutions on environmental issues was 25% through mid-May, compared with 38% for all the prior proxy season ended June 30, 2022, and 43% for all of the prior year