Energy, Politics & Money - 5 June 2023
In this roundup, we take a closer look at the Shangri-La security conference that took place in Singapore over the weekend. The US and China used very different tones in their public messaging at the event. The US was decisively hawkish, focusing on what China is not doing right in the US view, criticizing it for dangerous military maneuvers and its refusal to allow the Chinese defense minister to meet with the US secretary of defense (as long as he is on the US sanctions list). For its part, China was significantly more dovish, focusing on the negative consequences a further escalation of the conflict between the two countries would have for the world, arguing there is no need for this conflict and that collaboration and “growing together” is possible. In our view, actions on the ground support this assessment that the US is more of the hawk in the current situation. During the conference it sailed warship through the Taiwan Strait, which very much predictably angered China, while the US allies Germany announced it would send warships to Asia Pacific. All this is in line with our thesis that the US consciously escalating tensions in the Asia Pacific, and leaves us wondering how long it will continue to do so, and how far things will eventually reach – World War 3?
Furthermore, we look at:
- The surprise Saudi oil production cut of 1 million barrels per day, in order to support the oil price while maintaining harmony in OPEC+
- Joseph Stiglitz’s view that the US has been wise to pass the IRA and CHIPS Act, but now needs to work to bring other countries on board with its program to rewrite the rules of international economics
- Nouriel Roubini’s review of the recent G-7 in Japan, and he came to the same conclusion as EPM earlier, namely that it clearly communicated the US and its allies are on collision course with China
- which includes an assessment of the military balance between the US and China in Asia; the Chinese preference to avoid war with the US; and the US navy’s
- The International Energy Agency venture into “EV supply chain management”, as it tries to support the “de-risking” the G-7 recently called for
- A review of where climate financing is actually going, which found that at least parts are going into chocolate shops, airports, hotels, and even a coal fired power plant
- The UN sponsored talks in Paris on a Climate Accord-like treaty against plastics waste, which ended last week with disagreement
- The rapid growth in Investment related to electric vehicles in North America, which is expected to hit $140 billion by 2028, and represents a massive success for the IRA, but which EPM believes will come at a political backlash as the US allies in Europe and Asia are not happy with the development
- The significant decline in support for climate-focused resolutions at shareholder meetings in the US
General Energy News
OPEC+, or to be precise, Saudi Arabia has surprised the market in support of the crude oil price. The country's output will be reduced to 9 million barrels per day (bpd) in July from around 10 million bpd in May, the biggest reduction in years, writes Reuters.
The 1mn b/d cut will initially be for July but could be extended, Prince Abdulaziz said. He described it as a “Saudi lollipop” or sweetener for the group, whose other members were spared from making additional cuts this year, writes the Financial Times.
Where does this leave OPEC+ supplies to the market? OPEC+ has in place cuts of 3.66 million bpd, amounting to 3.6% of global demand, including 2 million bpd agreed last year and voluntary cuts of 1.66 million bpd agreed in April. Those cuts were valid until the end of 2023, but will be extended until the end of 2024. In addition, the group also agreed on Sunday to reduce overall production targets from January 2024 4.7 million bpd, writes S&P Global. However, many of these additional reductions will not be real as the group lowered the targets for Russia, Nigeria and Angola to bring them into line with actual current production levels. The United Arab Emirates, meanwhile, was allowed to raise output targets by around 0.2 million bpd to 3.22 million bpd.
The above means that EPM was “directionally right” last week, when we forecasted Saudi would cut in order to make room for a UAE production increase. We expected the net-result to be close to zero, however, assuming OPEC+ would adopt a wait and see approach as we head into summer in the Northern Hemisphere. Clearly, we underestimated the Saudi’s desire to see higher oil prices, but we wonder how sustainable their path is. They are no producing 9 million barrels per, with a capacity of 12.
Saudi Arabia has proposed visiting American leaders to develop a joint U.S.-Saudi project to build the country’s civilian nuclear energy program, writes Semafor. The project — referred to as “nuclear Aramco” — is designed to bolster Saudi Arabia’s ambitions to produce, and potentially export, atomic energy, while also addressing U.S. and international concerns about the proliferation of nuclear weapons technology. The Saudis have specifically cited their state oil company, Aramco, as a model for how civil nuclear cooperation with the U.S. could progress. The company started in the 1930s as a partnership with John D. Rockefeller’s Standard Oil and was initially called the Arabian American Oil Co. Today it’s wholly Saudi-controlled and is among the world’s most profitable companies.
Macroeconomics
Joseph Stiglitz has an opinion piece in Project Syndicate in which he explains why, in his view, “industrial policy” is a requirement for economic development, why the US has taken important steps forward in bringing back the government on industrial policy that served it well during the first half of the 20th century, and what it now needs to do more to make the Inflation Reduction Act and CHIPS Act have the impact they are aiming to have. In short, it should ensure that other countries are not left behind. The US has prevented the WTO to function as designed to avoid being challenged in the body over the IRA and CHIPS. Instead, Stiglitz argues, it should work with other countries to rewrite the “rules of the game” of international economics.
Geopolitics
Following the recent G-7 in Hiroshima, Japan, it is now clear to all that the United States and its allies are committed to containing China’s rise, writes Nouriel Roubini for Project Syndicate. While US president speaks of “thawing”, the reality of the relationship between the US and China is that of a new cold war getting colder, he says. Something which EPM, as you know, agrees with. Roubini noticed that the G-7 very clealy aimed at establishing an international alliance against China, including the US, its main allies in Asia Japan and Australia, the EU, but also “independent countries” such as India and Indonesia, as well as Africa. You may recall this was also what we at EPM wrote in analysis of the G-7 at the time it happened.
Officials and security analysts from around the world are in Singapore for the annual Shangri-La Dialogue on security. US Defense Secretary Lloyd Austin and his Chinese counterpart General Li Shangfu are at the forum, and the question whether they will meet or hangs over the event. The US has requested a meeting, but China has indicated it will not allow for a formal meeting as long as the US keeps General Li Shangfu on its list of sanctioned individuals, as EPM reported earlier. Irrespective of whether they meet, the shadow of both men will hang over the conference, writes the South China Morning Post. In an atmosphere of rising tensions between China and the United States on a range of issues, including their growing military presence in the region, the conference will be trying to make a cool assessment of the balance of power between the two forces, it says. Observers say the military balance between China and the US in Asia was shifting in favour of Beijing, with the People’s Liberation Army rapidly catching up in hypersonic weaponry and other capabilities to compete with Washington in “key battlefields” such as Taiwan. However, the PLA has yet to bridge the gap in terms of force integration, joint operations and real combat experience. The US, meanwhile, has been strengthening its alliances and partnerships in the region in a bid to stop China gaining the upper hand. As a result, the US maintains an overall military edge in the region, but there is no doubt that the PLA has narrowed the gap, even taking the lead in some emerging technologies.
At the Shangri-La conference, US defense secretary Lloyd Austin criticized China, writes the Financial Times. For conducting dangerous aerial intercepts over the South China Sea, and refusing to officially meet at the conference. China was conducting “an alarming number of risky intercepts of US and allied aircraft flying lawfully in international airspace”, Austin said. “We do not seek conflict or confrontation, but we will not flinch in the face of bullying or coercion.” Regarding China’s refusal to allow its defense minister to meet with Austin, until the US removes him from the US sanctions list, Austin said, “For responsible defense leaders, the right time to talk is any time, the right time to talk is every time, and the right time to talk is now. Dialogue is not a reward. It is a necessity.” In the EPM view, Lieutenant General Jing Jianfeng, deputy chief of the joint staff department of the Central Military Commission, Beijing’s top military organ, analyzed these comments correctly. “The US has been calling for communication and exchanges on the one hand and undermining China’s interests and concerns on the other, and claiming to enhance the management and control of crisis on one hand and acting tough and showing provocation on the other,” he said. In our view at EPM< that assessment is aligned with the facts.
The Chinese Defense Minister Li Shangfu approached the subject with a different and from a different perspective. His country seeks dialogue over confrontation, writes Nikkei Asia. He also said that conflict between China and the United States would be an "unbearable disaster" for world., and that the world was big enough for China and the U.S. to grow together. "A Cold War mentality is now resurgent, greatly increasing security risks," he said. "Mutual respect should prevail over bullying and hegemony."
Li’s remarks came as the United States and Canada had their navies stage a rare joint sailing through the sensitive Taiwan Strait on Saturday. Very predictably, this angered China, which according to the same Nikkei Asia report called it an act aimed at "deliberately provoking risk". And indeed, in the view of EPM this Chinese assessment is correct. For just imagine what the US response would be if the Chinese navy were to sail through the gap between Cuba and Florida!
Despite the above, Germany has decided to send two warships to the Indo-Pacific in 2024, Defence Minister Boris Pistorius said on Sunday, writes Reuters. An unforgiveable strategic blunder in the EPM view. The German warship will do nothing to influence China’s plans regarding Taiwan in any way. It is pure virtue signaling. What it will do, however, is anger China, one of Germany’s main trading partners. That is why we believe the German move is a disaster for German economic interests.
Energy Transition & Technology News
The International Energy Agency will establish guidelines by the end of the year that aim to limit import dependence of its members on a single supplier for key minerals that are essential for the spread of renewable energy, Nikkei Asia writes. Lithium, nickel and cobalt will be targeted. Levels of total procurement by the approximately 30 IEA member countries will be set for those minerals. Minimum percentages to be supplied within members of the IEA will also be established. The IEA is responding to requests from the Group of Seven countries to develop the standards. In the case of the EU, 79% of its lithium is sourced from Chile, 63% of its cobalt comes from Congo, and more than 85% of its rare-earth metals are from China. The goal by 2030 is to reduce dependence on one country to less than 65% of consumption and to increase supplies from within member countries to at least 10%. The IEA will use these figures to set the standards. To reduce dependence on a specific country, it will also consider joint investment by several member countries in another resource-rich country and promote the creation of supply chains to ensure stable supply.
Climate Politics
As part of the COP meetings on climate change mitigation, the developed world has since long pledged $100 billion a year to the developing world, to help prevent and mitigate the effects of global warming. Developed nations reported more than 40,000 direct contributions toward the finance target, totaling more than $182 billion, from 2015 to 2020, the last year for which data is available. Reuters looked at where the money is going, and found significant sums going to projects unrelated to climate mitigation, including a coal plant, a hotel and chocolate shops. Italy helped a retailer open chocolate and gelato stores across Asia. The United States offered a loan for a coastal hotel expansion in Haiti. Belgium backed the film “La Tierra Roja,” a love story set in the Argentine rainforest. And Japan is financing a new coal plant in Bangladesh and an airport expansion in Egypt. Funding for the five projects totaled $2.6 billion, and all four countries counted their backing as so-called “climate finance” – grants, loans, bonds, equity investments and other contributions meant to help developing nations reduce emissions and adapt to a warming world.
The UN sponsored talks in Paris on a Climate Accord-like treaty against plastics waste ended on Friday, with divisions, writes the Financial Times. A group of 130 countries, including Mexico, Canada, New Zealand and most of Europe, want binding rules. But fossil fuel producing countries such as the US, Saudi Arabia, Russia and China want a less ambitious, voluntary system in which countries are free to establish their own frameworks. There was also disagreement as to whether the focus should be a reduction in plastics production and usage, or an increase in recycling. A coalition of businesses has backed the stricter approach, including some of the world’s biggest consumer groups such as Unilever, Nestlé and PepsiCo, as well as retailers and packaging makers. At the talks, they campaigned for standardized rules to address the full lifecycle of plastics, including reducing production, reuse and recycling, and the phasing out of harmful chemicals. EPM notes that it is in the interest of business to have globally binding rules, as otherwise companies based in the countries that do not follow the rules will have an advantage.
The Electrification of Transport
Investment related to electric vehicles is growing rapidly in North America, with the world's 10 largest automakers spending about $140 billion there between 2022 to 2028, according to a Nikkei Asia analysis. The $140 billion breaks down to 50% by U.S. automakers General Motors and Ford Motor, 20% to 30% by Japan's Toyota Motor and Honda Motor, and the remainder by European and South Korean companies. Investments are concentrated on batteries, which determine the competitiveness of EVs. The bulk of the total EV-related investment by the 10 major automakers -- about $100 billion -- will be for batteries. According to a Reuters survey, global automakers plan to invest about $1.2 trillion in EV-related investments by 2030. Based on this, a simple comparison shows the U.S. alone would attract more than 10% of the investments – in no small part thanks to the IRA, Nikkei Asia says. It also says this is raising significant concern in Europe, Japan and South Korea, who fear a “hollowing out” of their economies – rightly so, in the view of EPM.
The Global Energy Crisis
Other
Support for climate-focused resolutions at shareholder meetings has dropped significantly this year, writes Semafor. Support is now back to 2017 levels, and behind the decline is a new focus on energy security following the Russian invasion of Ukraine, but also somewhat of a rethink on ESG in the US, where it has become a polarizing political subject. Lastly, environmentalist campaigners have increased their demands over recent years, and as such some pushback was bound to happen at some stage.