Energy, Politics & Money (EPM) - 09 March 2023
In this roundup, EPM takes another deep dive in the area of geopolitics – but how could we not, when global events disrupted the global energy markets in 2022 (what an understatement) and will likely continue doing so going forward? Following the accusation by Seymour Hersh, the US has released its new perspective on the Nord Stream pipeline sabotage. After months of arguing Russia must have been behind it, it now says Ukrainian groups are responsible – a theory which the Europeans appear unwilling to accept. This, we believe may lead to a weakening of America’s leadership in Europe.
Furthermore, we look at:
The outlook for US Shale, which is likely close to its peak
The EU’s push to end the import of Russian LNG
The inflation saga, where at EPM we look at what is causing it to continue, and how the Fed is likely to respond
The impact the IRA will be having on European industry, as European industry leaders from a variety of sectors openly complain about the EU response and are holding back investment in Europe to crank up the pressure
Diesel giant Cummin’s new strategy for the future. It is not based on growth in its core markets bur rather sees its redirecting attention to other transportation solutions (batteries, fuels cells, hydrogen)
General Energy News
The number of “big wells” in America’s shale patch is shrinking, writes the Wall Street Journal, which considers it as evidence that companies have drilled through much of their best wells. This, if correct, would suggest the era of shale growth is nearing its peak.
According to Reuters Kadri Simson, the EU’s energy policy chief, has said European Union countries and companies should not sign new contracts to buy Russian liquefied natural gas. Deliveries of Russian LNG to Europe increased last year to 22 bcm, up from around 16 bcm in 2021. The EPM perspective is that just as with crude oil and refined products, the result will be a diversion of Russian LNG to Asia, which will then free up LNG from other cargoes to flow into Europe. Ergo, not a (significant) reduction in global supply, but a less efficient system with higher prices.
Macroeconomics
The Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the “totality” of incoming information suggests tougher measures are needed to control inflation, Reuters writes that Fed Chair Jerome Powell told US lawmakers.
The persistence of inflation is a bit of a mystery to economists, writes Bloomberg. Many of the shocks of the last few years have faded. And the Fed has raised rates aggressively, with seemingly only a modest impact. So why are companies still raising prices? In a podcast, it provides its answer: management teams are still being rewarded for "price over volume" strategies. Companies in this environment are happy to sacrifice a bit of volume sales in order to keep moving through large price increases (and can they really blamed for this?).
China has witnessed a rapid revival of consumer spending in service sectors since the Lunar New Year holidays started January 21, writes S&P Global. There has been a remarkable growth seen in spending, indicated by a major increase in sectors such as dining, movie going, accommodation and tourism, it says.
Geopolitics
The US intelligence community believes a pro-Ukrainian group carried out the attack on the Nord Stream pipelines last year, writes the New York Times. But US officials said: they have no evidence President Volodymyr Zelensky of Ukraine or any of his top lieutenants were involved in the operation or that the perpetrators were acting at the direction of any Ukrainian government officials.
EPM notes this theory to explain the Nordstream sabotage comes a month after the Seymour Hersh article on Substack which accused the US of being behind the act – a theory the New York Times was unwilling to cover. This leaves us with the distinct impression that rather than journalism, we are dealing with an act of deliberate and willful influence to redirect the narrative.
This seems to be the opinion of German officials as well. Again according to the New York Times, the Germans are waiting for the results of further investigations before drawing any conclusions and, at the same, offered a third theory. Boris Pistorius, Germany’s defense minister, offered that the attack could also have been a “false-flag action” to make it appear it had been carried out by pro-Ukrainian groups: “The likelihood of either is equally high.” An analysis by Responsible Statecraft also concludes the Times theory doesn’t quite pass the smell test:
It is (indeed) suspicious that suddenly this intelligence comes to light — many months after the fact. It’s odd, and it very conveniently serves as an alternative to Sy Hersh’s reporting
At EPM, when we take a step back and reflect, it seems to us this new American narrative is unlikely to strengthen the European’s trust in American leadership. In fact, the German’s response indicates they don’t believe the new US story, and if they were anything like us, this should be making them think “we are being lied to”. And that, of course, could weaken the alliance that has enable the Ukraine to put up the fight against Russia. Or, not.
According to Nikkei Asia, the reason behind China’s recent diplomatic efforts in the Ukraine War is an assessment by Chinese military experts the war will come to an end this summer. The Academy of Military Sciences reports directly to the People's Liberation Army. Although it cannot be found on a map, the institution is located in Beijing’s Haidian district. The AMS regularly issues recommendations and reports to the Communist Party's Central Military Commission, the highest decision-making body for China's armed forces. A cabinet-level official heads the academy. In December, Nikkei Asia says, the AMS completed a simulation on the Ukraine conflict, resulting in an astonishing finding, according to sources close to the Chinese government. The war will draw to a close around summer 2023, the simulation indicated, with Russia having the upper hand.
Further according to Nikkei Asia, China’s legislature is set to approve an administrative overhaul this week that would put public security, financial regulation and technology -- areas now handled by the state -- under direct Communist Party control. By tightening the party’s control over a broader swath of government, Beijing seeks to ensure its financial system and supply chains, especially for semiconductors, are prepared for a Taiwan conflict and any Western sanctions that ensue.
The Financial Times writes the Dutch government will impose export restrictions on deep ultraviolet lithography (DUV) semiconductor technology, giving the first public details of the deal that The Hague and Tokyo struck with the US in January to limit sales to China. The US has convinced its Dutch and Japanese allies, which produce critical chipmaking technology, to cut off China from the most advanced chips that could be used in sophisticated weaponry and machines. ASML’s extreme (EUV) tools, which are even more advanced, have been banned from sale to China since 2019.
Lastly, an excellent analysis in the Financial Times rightly points out that the likeliest alternative to today’s US-China stand-off is not a kumbaya meeting-of-minds, but war.
Energy Transition & Technology News
Executives at CERAWeek energy conference said this week that billions of dollars in clean energy incentives are poised to speed investment on American soil while putting the European Union’s energy transition at risk by luring away money and talent writes Reuters. The IRA directed some $370 billion in tax benefits to U.S. development of solar, wind, geothermal, and other renewable energy technologies, as well as to electric vehicles and projects that reduce or capture industrial greenhouse gas emissions before they reach the atmosphere. Josu Jon Imaz, CEO, of Spanish energy provider Repsol, is quoted saying:
It would be great to see the European Union policy move from stick to carrot. We don't need banning technologies, we don't need restrictions, we need to be attractive.
Climate Politics
Volkswagen is putting on hold a planned battery plant in eastern Europe and prioritising a similar facility in North America after estimating it could receive €10bn in US incentives, writes the Financial Times. EPM mentions this news under Climate Politics, because this decision by VW is a direct result of America’s IRA.
The Electrification of Transport
Cummins, a century-old industrial giant best known for making diesel engines and generators, has a new strategy for a multi billion-dollar clean tech business, writes Forbes. It has established Accelera, a new brand, focused on batteries, fuel cells, electric truck components and electrolyzers for producing “green” hydrogen from water and electricity.
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