Energy, Politics & Money (EPM) - 28 Feb. 2023
Independent, objective, and politically neutral analysis of global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, we look at:
The (un)likelihood of Gulf oil trade turning away from the US dollar
The decline of foreign investment in China, driven by the geopolitics surrounding the US – China geostrategic competition
The mystery that is the US economy at present, which is showing signs of a recession, as well as an economic boom, at the same time
Germany’s failure to live up to its promise to significantly raise investment in its military
Occidental’s delaying of its direct air capture carbon-reduction project to mid-2025
Small modular reactors, which seem to be experiencing exactly the same thing conventional nuclear reactors experienced in the 1960s – a practicable inability to deliver upon the hopes and dreams
Germany’s request to the European Union to allow combustion-engine cars that run on CO2-neutral fuels to be sold in Europe after 2035, the date by which the EU has agreed all new cars should have zero emissions
Greta Thunberg’s protest against Europe’s largest onshore wind farm in Norway, as it is on land traditionally used by Indigenous Sami reindeer herders
The BloombergNEF report that looks at the level of financing that banks are pouring into the energy transition
General Energy News
Oil headed for a fourth consecutive monthly decline as concerns about tighter monetary policy and swelling stockpiles in the US eclipsed optimism about rising demand in top importer China, writes Bloomberg. WTI for April settlement is $76.32 per barrel, but is still down more than 3% this month. Brent for April settlement is to $82.98 per barrel.
Javier Blas of Bloomberg pours cold water on the idea that the Gulf oil producers are eager to drop the dollar and switch to yuan trade. He correctly notes, in diplomacy, what’s left unsaid often matters more than what’s said. Ask quietly in government circles in Riyadh, Abu Dhabi, Kuwait City or Doha about the petroyuan, he says, and the response — even in the weeks following Xi’s visit to Riyadh — is unanimous: the petrodollar is here to stay.
As recently as 2021, Shell explored the possibility of shifting the company’s listing and headquarters to the US, writes the Financial Times. Primary reason: on the US market, ExxonMobil and Chevron are valued at about six times their cash flow, compared with about three times for Shell.
Macroeconomics
Investment by foreign companies in China tumbled to its lowest level in 18 years in the second half of last year, writes Nikkei Asia. Foreign direct investment into China totaled $42.5 billion between July and December 2022. Meanwhile, foreign direct investment by Chinese companies grew 21% to $84.2 billion. The $41.7 billion net outflow marked the first in five and a half years. Recent years have seen almost no new entries by European companies. And among businesses that continue to invest in China, there is a trend of “internal decoupling”, with companies including large automakers segregating their Chinese and non-Chinese supply chains to limit risks such as technology leaks. Other companies have scaled back their Chinese operations or pulled out entirely. This comes as tensions between Washington and Beijing over advanced technologies have increased risks for companies with China at the center of their supply chains.
Reuters looks at the mystery that is the US economy at present. While some indicators clearly show a recession (coming), others are indicating an economic boom. The interest rate increases have clearly slowed housing and technology, important growth areas. In the bond market, yields on shorter-term government debt are above those for longer-term securities, a classic recession signal But the job market remains exceptionally tight. Globally, Reuters is seeing similar dynamics, in the euro zone and the United Kingdom.
Geopolitics
The fundamental geostrategic weakness of Europe is laid bare again by the debate in Germany over investment in its military. German Defense Minister Boris Pistorius will only get half the extra cash he wants in his budget for next year. Pistorius has said he needs an additional €10 billion ($10.6 billion) to lift annual defense spending to €60 billion and help drive Germany’s push to modernize the military after decades of under funding. But Finance Minister Christian Lindner is open to an increase of €3 billion, which could potentially be raised to €5 billion if the government reaped more than expected in tax revenue, writes Bloomberg.
EPM’s perspective is that if the war in Ukraine does not make clear enough to Germany’s elites that sustainable prosperity requires investment in all the tools that are needed to protect a nation’s interests, including the military, nothing will. To us this means Germany will remain aligned with the US on geopolitics, and there is little to no chance of Europe developing an independent perspective and corresponding diplomacy on geostrategic affairs.
Energy Transition & Technology News
Occidental says it will be delaying its direct air capture carbon-reduction project, writes Reuters. Occidental plans to build dozens of DAC plants, as part of an “emissions reduction as a service” business proposition. The first large-scale DAC plant will be postponed to mid-2025, from late 2024 previously.
Wired looks at the hopes and dreams surrounding small modular reactors, which seem to be experiencing exactly the same thing conventional nuclear reactors experienced in the 1960s – a practicable inability to deliver upon the hopes and dreams. In 2017, Los Alamos signed up to join a group of other local utilities as an anchor customer of the first small modular reactors (SMRs) in the US, created by a company called NuScale. The design, which calls for reactors only 9 feet in diameter, had never been built before, but was promised to be much cheaper than a full-scale reactor and to offer affordable carbon-free energy 24/7. This month, Los Alamos were facing a weighty decision, whether or not to pull the plug on their nuclear dream, as NuScale had informed them that the estimated costs of building the six 77-MW reactors had risen by more than 50 percent to $9.3 billion. For Los Alamos, that translated into a jump in the cost of energy from $58 to $89 per megawatt-hour. And, without extra subsidies from the new Inflation Reduction Act—on top of $1.4 billion already committed to the project by the US Department of Energy—the price to energy users in places like Los Alamos would have doubled.
Climate Politics
Germany has asked the European Union to propose rules allowing combustion-engine cars that run on CO2-neutral fuels to be sold in Europe after 2035, the date by which the EU has agreed all new cars should have zero emissions, writes Reuters. Germany's state secretary for transport said
The commission should come forward with a proposal [on] how e-fuels can be used, or how combustion engines which are run with climate-neutral fuels can be can be organized
At EPM we see this as the lobbying of vested interest in action. The German automakers were late to the EV game, missing the early signs of its inevitability, and are now scrambling to remain relevant. We believe the efforts targeting legislation are misplaced, as the main threat to the German pride, the internal combustion engine, does not come from legislation but technology – EVs are more comfortable to drive, easier and cheaper to maintain, and will soon be cheaper to produce. CO2-neutral fuels will always be more expensive than conventional liquid fuels, and as such will only worsen the cost disadvantage that ICEV will face vis-à-vis EVs post 2025…
Other
Reuters reports that environmental campaigner Greta Thunberg, and hundreds of other activists, on Monday blocked entrances to Norway’s energy ministry, protesting against wind turbines – Europe’s largest onshore wind farm – built on land traditionally used by Indigenous Sami reindeer herders. “Indigenous rights, human rights, must go hand-in-hand with climate protection and climate action. That can't happen at the expense of some people. Then it is not climate justice,” Thunberg told Reuters. Reindeer herders in the Nordic country say the sight and sound of the giant wind power machinery frighten their animals and disrupt age-old traditions. The EPM perspective is mixed. One the one hand, we sympathize with the people’s whose lives have been affected by the renewable energy project. On the other hand, it is practically impossible to have a modern economy without something, somewhere, being affected – either humans, animals or natural beauty.
A Bloomberg NEF report that looks at the level of financing that banks are pouring into the energy transition says the ratio of clean-energy lending and equity underwriting relative to fossil fuels needs to hit 4 to 1 by the end of the decade to meet the Paris Agreement of 2015. That ratio was roughly 0.8 to 1 at the end of 2021, according to the report. Since the Paris Agreement at end of 2015, about $4.6 trillion of bonds and loans have been committed to businesses focused on hydrocarbons, roughly double the $2.3 trillion arranged for renewable projects and other climate-friendly ventures, according to data compiled by Bloomberg. Banks have faced considerable criticism for their support of the fossil-fuel industry. The banking industry has countered that it wants to assist the transition to a low-carbon economy by staying engaged with oil, gas and even coal clients.