Energy, Politics & Money (EPM) - 14 March 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
2023.10.14
In this roundup, EPM takes a look at:
The impact of SVB’s collapse on crude oil prices and possible tertiary financial market effects
China’s real estate and demographic problems, and the reorganization of financial regulatory and oversight bodies to manage it
Thailand's state-owned energy company PTT Group energy transition strategy, which focuses on LNG to displace coal, and the manufacturing of EVs
What the US, UK and Australia deal for supplying nuclear submarines to Australia means for Asia and China
China’s concern about nuclear proliferation
PTT’s (Thailand’s national oil company) plans to produce up to 200K EVs by 2030 with Foxconn
General Energy News
Oil prices have continued their decline, due to worries around the recent Silicon Valley Bank (SVB) collapse. EPM covers this subject in detail under Macroeconomics (below) but as to how it has affected oil so far, on Monday Brent fell to its lowest since early January, while WTI dropped to its lowest since December, reports Reuters. During early trading on Tuesday, WTI for April delivery continued its decline, trading below $74 per barrel, as did Brent for May settlement, now below $80 per barrel, according to Bloomberg.
Javier Blas of Bloomberg notes that long-dated oil prices are now at $65 a barrel, well below current price levels. He states that it looks like the global oil industry is exaggerating its alarm about underinvestment threatening a medium-term supply shortage. And, he says, the financial markets are probably exaggerating their dismissal of the oil industry’s “investment-is-too-low-to-meet-future-demand” message. The financial market view is that supply and demand will not be as tight as the industry is warning. Why?
Investment recovered significantly in 2022, and oil companies are set to lift spending even higher in 2023 and beyond.
Russian oil production hasn’t collapsed as feared due to Western sanctions.
Oil demand growth is likely to slow over the next two to three years, from an historic average of about 0.8 to 1.2 million barrels a day to as little as 0.3 to 0.5 million barrels a day.
Macroeconomics
Of course we start our review of macroeconomic matters of relevance for the energy industry with SVB’s collapse and the resulting fall out. Although emergency measures have been taken to bring calm to the market – Reuters reports customers will have access to all their deposits starting Monday and a new facility has been set up to provide banks with access to emergency funds – investors are running away from banks globally, causing not only strong declines in share prices, but more importantly creating stress in the financial system as interbank loans are drying up. Major US banks lost around $90 billion in stock market value on Monday reports Reuters, bringing their loss over the past three trading sessions to nearly $190 billion. On Monday, Japan’s banking sub-index was down 6.7% in early trade on Monday, to its lowest since December. Europe’s STOXX banking index closed 5.7% lower, with Germany’s Commerzbank falling 12.7% and Credit Suisse 9.6%. On Tuesday, Reuters reports, Japan’s banking subindex continued its decline, dropping more than 5% in early trading, as Hong Kong shares in HSBC and Standard Chartered dropped more than 5%.
In total, global financial stocks have now lost $465 billion in market value, writes Bloomberg. It is too early to predict how exactly this will affect the real economy, but at EPM we are looking at the potential of “tertiary effects” – the decrease in share prices (secondary effect) triggered by the SVB collapse (primary effect) triggering clauses in financial agreements that worsen the liquidity situation.
It is because of this “potentiality” that the US Fed has established a new “Bank Term Funding Program”, offering one-year loans to banks under easier terms than it typically provides, and relaxed terms for lending through its discount window its main direct lending facility, Bloomberg writes. For an overview of the most liquidity indicators in the financial market see this Bloomberg article.
The stress in financial markets has caused a belief among investors the US Fed is now unlikely to announce another rate hike anytime soon writes Reuters. For example, a week ago Barclays economists raised their forecast for the Fed’s March 21-22 meeting to a 50-basis point rate hike from 25 bps, but on Monday they changed that to zero.
Paul Hodges of New Normal examines China’s real estate problem, in his typical “integrated manner”. China has the highest real estate prices in the world relative to income, he notes, with Shanghai at 47x and Beijing at 45x, versus London and New York look at 16x and 10x income, respectively. He connects this with China’s demographic problems, the unbalance between men and women in society, which is lowering the numbers of family in society, and lowers the birth rate, causing decline in the overall population. His conclusion is that the fundamentals do not support a resolution of China’s real estate problem. At EPM we believe this viewpoint is hard to argue with, although we do note that this does not mean “imminent collapse”. As we have mentioned before, the Chinese government should be expected to utilize debt increases to prevent a collapse from happening in the foreseeable future.
It makes sense to us at EPM, therefore, that at the just concluded National People’s Congress, the Chinese government announced an ambition to reorganize financial regulation. Under the changes announced, Nikkei Asia writes, China’s existing banking and insurance regulator will be replaced by a new agency called the National Financial Regulatory Administration. The People’s Bank of China, meanwhile, will focus more on macro-economic issues and less on financial regulation. Among the new body’s objectives is to bring more centralized control over debt creation by local governments.
Geopolitics
The US, UK and Australia announced the details of their deal making supplying nuclear submarines available to Australia, reports Reuters. In a joint statement regarding the deal, the United States stated intends to sell Australia three US Virginia class nuclear-powered submarines, built by General Dynamics, in the early 2030s with an option for Australia to buy two more if needed. One or two of these could be vessels that have been in US service, although this would require congressional approval. The agreement will also see US and British submarines deployed in Western Australia as soon as 2027 to help train Australian crews, and allow for technology-sharing and transfer to enable Australia in building its own boats with the help of the British.
According to Reuters, China has condemned the deal as an illegal act of nuclear proliferation. In a position paper sent to IAEA member, China states:
The AUKUS partnership involves the illegal transfer of nuclear weapon materials, making it essentially an act of nuclear proliferation.
Over at Bloomberg, James Stavridis, retired US navy admiral and former supreme allied commander of NATO, explains why China is angered by the deal. He notes that the US Virginia class nuclear-powered submarine is an attack submarine and a “deadly killer that threatens any surface ship on the planet.” The deployment of US and UK (and eventually Australian) nuclear attack submarines in Australia – notably out of Perth on the western coast of the vast Australian continent – is less about training and more about threatening China:
The addition of these powerful undersea warships will bring significant fighting capability to the western powers in the South China Sea. Even as China seeks to consolidate its territorial claims on that body of water … the increasing capability of nuclear attack submarines … will undermine its ability to enforce claims of sovereignty… (It) will also allow more aggressive US Navy presence in support of Taiwan in the contested regions.
Most importantly, Stavridis argues the deal will rally other Asian countries behind the US – Japan, South Korea, Thailand, Philippines, Singapore, and most importantly India. In the view of EPM, this explanation of the AUKUS nuclear submarine deal explains why it is important. It is a further signal the US is preparing, with its allies, extensive offensive military capability in the Pacific. This confirms EPM’s thesis, articulated in earlier posts, the world is moving closer to global war almost every day – and that you need to prepare your investment portfolio for this possibility.
Energy Transition & Technology News
Thailand's state-owned energy company PTT Group is accelerating efforts in the area of sustainability and decarbonization, writes Nikkei Asia. It plans to spend some 100 billion baht ($2.86 billion) in the coming five years to increase liquefied natural gas (LNG) import stations and produce electric vehicles. EPM notes PTT’s electric vehicle ambitions appear to set it apart from all other oil companies. Some of its peers have established battery businesses (TotalEnergies) but none have articulated an ambition to manufacture EVs. PTT plans to begin EV production in 2024 at Horizon Plus, its joint venture with Taiwan’s Foxconn located in the Thai province of Chonburi. Horizon is expected to make between 150,000 and 200,000 EVs by 2030, while PTT hopes to build 7,000 EV charging stations through a group company by the same year.
The Electrification of Transport
The Financial Times has a deepdive on Northvolt, the Swedish start-up that wants to take on rivals in Asia and the US in the battery sector crucial to the green transition.