Energy, Politics & Money (EPM) - 06 Mar. 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
In this roundup, the team at EPM takes a closer look at the long-term impact of inflation on economic growth. With the episode of high inflation behind us, the prescription for a long-term solution will likely require further monetary policy tightening and for a longer time. The long-term prognosis held by some? We face a period of long-term inflationary pressure and growth, but at a slower rate than what we just experienced. Read below for more!
Furthermore, we look at:
Record global oil consumption in 2023 resulting in production deficits in the second half of 2023
Pressure from investors on oil and gas companies to return cash – buy backs and dividends
China’s predicted economic growth of 5.5% in 2023 and its increase in military spending
European strategic natural gas reserves – higher than historical norms
The UN concluded a High Seas Treaty that places 30% of the seas into protected areas by 2030
Japan’s pledge to help ASEAN countries with decarbonization and battle climate change
Europe’s new energy normal – higher energy prices (3 times higher) for the foreseeable future
General Energy News
According to the International Energy Agency, oil consumption is heading for a record this year, writes Bloomberg. It all comes down to China: The world’s second-biggest oil consumer is snapping up crude after reversing its strict COVID-19 policies. Daily demand will reach an all-time high of 16 million barrels a day after contracting in 2022, according to the median estimate of 11 China-focused consultants surveyed by Bloomberg News earlier this year. It’s not just China. India and other countries across the Asia-Pacific region are consuming more oil as borders reopen, helping propel global demand to a record 101.9 million barrels a day this year and potentially plunging the market into a deficit by the second half, according to the IEA.
In this environment, oil executives – who in years past were rewarded for investing in gigantic, long-term energy projects – are now under the gun to funnel cash to investors who are increasingly convinced that the sunset of the fossil-fuel era is nigh, writes Bloomberg. John Arnold, the billionaire philanthropist and former commodities trader, said during a Bloomberg News interview in Houston.
The investment community is skeptical of what assets and energy prices will be. They would rather have the money through buybacks and dividends to invest in other places. The companies have to respond to what the investment community is telling them to do otherwise they're not going to be in charge very long.
With Europe rapidly nearing the end of the winter heating season, there is increasing confidence the region will have a record volume of gas still in storage, resulting in downward pressure on futures prices, writes John Kemp for Reuters. Inventories are +272 TWh (+66% or +2.55 standard deviations) above the prior ten-year average, compared with a deficit of -87 TWh (-21% or -0.82 standard deviations) on the same date last year. Europe’s consumption has been reduced through a combination of industrial closures, public information campaigns to reduce energy use, and milder than usual weather, coupled with brisk imports of LNG.
Macroeconomics
China set a modest target for economic growth this year of around 5%, writes Reuters. To bolster growth, the government plans to increase spending on infrastructure by 3.8 trillion yuan ($550 billion) through special local government bonds.
Inflation
The world’s leading central bankers remain concerned about inflation, and see higher rates for longer as a serious possibility. ECB Governing Council member Pierre Wunsch says the European Central Bank could consider raising its key interest rate as high as 4% if underlying inflation in the euro zone remains persistently high, writes Reuters. Across the Atlantic, according to Reuters, Thomas Barkin, President of Richmond Federal Reserve Bank, says he can envision a scenario where inflation remains more persistent than currently assumed and in response the Fed pushes the US benchmark policy interest rate to the 5.5%-5.75% range, again. The Financial Times writes that his colleague at the Fed, Mary Daly, President of the San Francisco Fed, believes that
In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will probably be necessary.
Then as to what is happening in inflation, Paul Hodges of New Normal is of the opinion it is not lowering. Rather, he says, it is increasing at a slower pace. The main reason for this, in his view, is the global food situation. Half of the world’s population relies on nitrogen fertilizer to provide the food it needs. And last year, 70% of European ammonia capacity was shut down due to the cutbacks in natural gas feed stock and high prices. The issue is that farming is a seasonal business, with long time-lags between planting and harvest. So food production lost last year, when fertilizer was reduced and/or unaffordable, will now be starting to have a major impact.
Geopolitics
The Financial Times has gone through the details of the Chinese government’s new budget, and noticed that China’s military spending will grow at its fastest pace in four years in 2023, and outpace other categories of expenditure, underscoring Beijing’s reweighting towards security over development. Defence expenditure will increase by 7.2 per cent in 2023, well ahead of the 5.7 per cent increase in general public expenditure, according to a draft budget presented to the National People’s Congress. Although China’s military spending is only one-third of the US level, it has grown fivefold over the past two decades according to the US think-tank CSIS, and now exceeds that of the 13 next-largest military spenders in the Indo-Pacific combined.
Quarreling in Warsaw and Berlin over missiles, tanks and spare parts has reached a new level, writes Bloomberg, exposing possible rifts that exist within the European Union when it comes for foreign policy.
Climate Politics
Following 10 years of negotiations, the United Nations have agreed the High Seas Treaty aims to place 30% of the seas into protected areas by 2030, to safeguard and recuperate marine nature, writes the BBC. These new protected areas, established in the treaty, will put limits on how much fishing can take place, the routes of shipping lanes and exploration activities like deep sea mining - when minerals are taken from a sea bed 200m or more below the surface.
Japan pledged financial and technological support on Saturday to help ASEAN countries accelerate their efforts to decarbonise their economies and combat climate change, writes Reuters. As the chair of the Group of Seven nations (G7) this year, Japan will hold a ministerial meeting on climate, energy and environment in Sapporo on April 15-16, ahead of the G7 summit in Hiroshima on May 19-21, to promote what it calls realistic energy transition. EPM notes that a core element of the Japanese vision for a decarbonized future is hydrogen / ammonia. You know our view on this, so we hope that is not where the Japanese will be focusing their financing – bit we expect it will be!
European policymakers and executives have become less worried that billions of dollars of US green subsidies will trigger an exodus of European firms across the Atlantic, and many now think a huge new package of rival aid would not be the right response, writes Reuters. The risk is offset not only by the substantial existing European incentives, they believe, but also other factors, such as proximity to European consumers.
The Electrification of Transport
Honda is seeking to catch up with peers in the race to EV space, for which it is betting on solid state batteries, writes Bloomberg. It quotes Honda CEO Toshihiro Mibe as saying: “The electric-vehicle business is very dependent on battery costs. Through the evolution of our technology, we will try to control those costs.” The automaker has teamed up with Sony to develop EVs and has pledged to sell only electrified vehicles by 2040.
The Global Energy Crisis
Javier Blas of Bloomberg looks at the “new energy normal” for Europe over at Bloomberg. In it, European gas changes hands at €45 ($48) to €50 per megawatt hour. For businesses, which paid an average of €20 for their gas between 2010 and 2020, this is a mixed issue. For most, current prices remain painful, although they can probably weather them with some additional belt tightening. For the region’s energy-intensive industries, however, such as chemical companies and glass manufacturers, prices remain catastrophically elevated. And it’s a similar story in power markets. UK short-term electricity prices appear to have settled at just under £150 ($180) per megawatt hour. That’s a fraction of the £550 seen in August and December last year, but triple the 2010-2020 average of just £45. To deal with this permanently elevated price level, companies are now raising prices.
At EPM we want to highlight the implications this will have. First, it undermines the competitiveness of the European companies operating in global markets – hence German petro-chemical companies shutting down facilities in Europe. Second, it boosts inflation, which will force the ECB to raise interest rates, which will worsen the economic decline from the loss of competitiveness.