Energy, Politics & Money (EPM) - 10 March 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
In this roundup, EPM takes a close look at:
Oil price faces short term head winds
The decimation of Silicon Valley Bank stock and the impact on Banks in the West
Iran and Saudi Arabia re-open relations in Beijing
US efforts to arm Australia with nuclear submarines and hypersonic weapons
The EU allows members states to provide incentives similar to those offered by the US’ IRA
Mitsubishi’s plans to spend big money on producing EVs and Hybrid vehicles for the South Asian market
General Energy News
Oil-market fundamentals look pretty solid, but prices face headwinds, writes Bloomberg. Supply from Russia has remained stronger than many expected. Barrels shunned by Europe are finding their way to markets in Asia. Then there’s the murky economic outlook. Chinese demand may be robust today, but a weaker-than-expected growth target earlier this month rattled investors. Most importantly, it’s clear central bankers haven’t yet got a grip on inflation.
The US has privately urged some of the world’s largest commodity traders to share concerns over shipping price-capped Russian oil in a bid to keep supplies stable and regain some oversight of Moscow’s exports writes the Financial Times. Officials from the US Department of Treasury met with executives and traders at Trafigura and Gunvor among others, according to five people familiar with the talks, and offered reassurances over expanding their role in Russian crude and fuels trade without breaching western restrictions. In the EPM view, this highlights (again) the stupidity in the way Russian energy has been handled by the countries dependent on them.
The Financial Times key takeaways from CERAWeek in Houston?
US-Europe energy ties get tense
Where will oil supply come from
The IRA has crashed the (oil and gas) party
Macroeconomics
Something to keep a close eye on: bank shares are tumbling. Reuters reports this was prompted by Silicon Valley Bank, a major banking partner for the US tech sector, which was forced to raise new capital after selling a package of bonds at a loss to meet depositor demands for cash. Over in Europe on Friday, then, HSBC went down 4.5%, Deutsche Bank is down 7.9%, while in Italy UniCredit and Intesa Sanpaolo also fell sharply. Shares in major US banks such as JPMorgan Chase & Co and Citigroup are set to fall when Wall Street reopens. Underlying the panic is the fact that global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve lifted US rates by 450 basis points from near zero, while the European Central Bank hiked the euro zone’s by 300 bps. And, there are concerns that price inflation is staying high, something that would drive further rate hikes.
Geopolitics
Iran and Saudi Arabia agreed on Friday to re-establish relations after a seven-year diplomatic rupture, reports Reuters. The agreement was reached after talks in – please take note! – Beijing, between top security officials from the two rival Middle East powers.
US President Joe Biden will meet leaders of Australia and Britain next week to announce a way forward for Australia to receive nuclear-powered submarines, reports Reuters. Australia is expected to buy up to five US Virginia class nuclear-powered submarines in the 2030s. It will be the first time the United States has shared nuclear-propulsion technology since it did so with Britain in the 1950s. In a second stage of the AUKUS project, the three countries will share advanced technology such as artificial intelligence and hypersonic weapons. British and Australian officials said last week there was still work needed to break down bureaucratic barriers to such technology sharing.
Energy Transition & Technology News
Increasingly, technology spillovers in the energy transition, with expertise generated in producing fossil fuels being turned to renewable energy projects, David Fickling says writing for Bloomberg. The offshore wind industry has learned important lessons from decades of drilling for offshore oil and gas. The knowledge gained here – forcing oil and gas from deep rocks over – may provide a crucial piece of the puzzle to build zero-carbon grids by turning geothermal energy from a niche industry into a powerhouse. This may also provide a source of minerals critical for the energy transition.
Climate Politics
Brussels has cleared the way for a subsidy race with the US over crucial new energy technologies writes the Financial Times. It will allow EU member states to “match” multi-billion-dollar incentives as they fight to keep projects in Europe. The measures will allow states to pump billions of Euros into producing solar panels, batteries, wind turbines, electrolysers, and heat pumps. One person involved in the development of the plan said:
This is quick and dirty money to match the Americans
The EPM perspective on this is that as we forewarned, a subsidy race is developing between the US and Europe. This is clearly good news for new energy industries as it will certainly accelerate the growth of a number of new technology areas. At the same time, there will be significant amounts of “waste” as in subsidies for technologies that fail to deliver on their promise and an overall weakening of fiscal position in both the US and Europe. More important, however, will be the strain on the US and Europe relationship. Clearly, and deservedly, Europe is very unhappy with the IRA something the US noted, but has ignored. Just last month, John Podesta, the Biden’s official in charge of implementing the IRA, said in an interview with the Financial Times that the US would make “no apologies” for prioritising American jobs as it tried to take control of global clean energy supply chains. But now, when it is too late, and after the US has clearly communicated to Europe it is an unreliable partner writes the Financial Times. The subject is also likely to be front-and-center when President Joe Biden and European Commission leader Ursula von der Leyen meet at the White House today, writes Bloomberg.
EPM now expects China to take steps toward Europe with an offer for a win-win economic collaboration. For example, this may come via Chinese companies investing in European manufacturing. Coupled with the Ukraine War, EPM believes that later historians may well point to the IRA and the EU’s response as “the moment the Atlantic partnership fell apart” and the US lost a vital and important ally in its conflict with China. How will America’s allies in Asia view its actions in Europe, and how will China respond is something EPM is watching carefully.
The Electrification of Transport
Mitsubishi Motors will invest more in developing electrified vehicles, such as, hybrids and battery electric vehicles writes Nikkei Asia. At a press briefing, Takao Kato, President and Chief Executive, said Mitsubishi plans to invest as much as 2.5 trillion yen (¥) in research and development and capital expenditure by 2030. It aims to allocate 70%, or about 1.7 trillion ¥ ($12.4 billion), in green cars. The main growth driver will its Southeast Asia core market. Regional competition is increasing as Chinese and South Korean rivals enter the market with EVs. Countries such as Thailand and Indonesia are eager to lure EV-related investment and are introducing subsidies to speed up the expansion of the domestic market for such vehicles. Mitsubishi currently does not sell EVs in the region.