Energy, Politics, & Money -
2023.10.11
In this roundup, we look at:
Why a strong US dollar will eventually be a challenge for the OPEC+ ambition to keep oil prices in the $80 – 100 range
Why the IMF downgraded growth projections for China's economy for both 2023 and 2024, and what this means for global growth
Why the current state of increasing disorder in the geopolitical realm is the result of the world reordering itself, i.e. something for which there is no quick fix, nor something that can be blamed on a single lone actor (“China!”)
The meeting between a six-member bipartisan group from the US Senate, led by Majority Leader Chuck Schumer, to Chinese president Xi in Beijing
The next successful Chinese clean energy sector facing trade restrictions implemented by governments in the EU and US, namely wind; where EPM explains how geopolitics drive the energy transition, and why we foresee this dominance of geopolitics to remain and grow
OPEC’s presence, for the first time, at a COP gathering, this year at COP28 in the UAE
The focus by Japanese specialty chemicals companies on supporting EV battery technology innovation
The massive growth – 107% year-over-year – in Chinese exports of EVs
Suriname’s plan to be first country to sell the Paris Agreement carbon credits known as internationally transferred mitigation outcomes, or ITMOs, at a price of $30 per credit, a multiple of the price being charged at the (in the EPM view completely fake) voluntary markets
General Energy News
Oil was flat on Tuesday, as the Israel-Hamas war remained contained within Israel and with Saudi Arabia’s pledge to help ensure market stability, writes Bloomberg. Brent is close to $89 a barrel, while WTI traded near $86 a barrel, after a war-risk premium returned to the market on Monday following Hamas’ surprise attack on the weekend.
Reuters looks at why over recent months the dollar and the oil price have both trended upwards. It notes that normally there is an inverse relationship between the two. As the dollars trends up, oil becomes more expensive in the local currencies of countries around the world, which reduces oil demand and consequently exerts downward pressure on oil prices. The reason both have moved higher at the same time is because while the US has hiked interest rates to stem inflation which support the dollar, top OPEC+ oil producers Saudi Arabia and Russia have voluntarily cut production beyond OPEC+ agreements. The question now is whether current months have been an aberration, or a new trend? Most analysts believe the current situation can not remain longer term. Eventually, both will negatively affect the economies of oil importing countries around the world, thereby reduce demand for commodities such as oil, and thereby the oil price.
Macroeconomics
Growth projections for China's economy for both 2023 and 2024 were downgraded by the IMF (International Monetary Fund) as the country's real estate crisis as well as weakened consumer and business confidence pose "significant risks", writes Nikkei. In the fall edition of its biannual World Economic Outlook, the IMF projects that China's economy will grow 5% this year and 4.2% in 2024, a cut of 0.1 and 0.2 percentage points, respectively. "Commodity exporters and countries that are part of the Asian industrial supply chain are the most exposed to China's loss of momentum," the report said. India, however, is seen continuing to lead all major economies growing at 6.3% this year -- a 0.2 percentage point upward revision reflecting better-than-expected consumption earlier in the year -- and 6.3% again in 2024. The resulting global growth forecast is at its lowest in decades, at just 3% this year and 2.9% in 2024, well below the 3.8% average in the two decades prior to the pandemic. "The global economy is limping along, not sprinting," the IMF says.
Geopolitics
The current state of increasing disorder in the geopolitical realm is the result of the world reordering itself, something it does every few generations, writes George Friedman of Geopolitical Futures. It is not a process that depends on the decisions of the mighty or something that can readily be stopped, he says. It flows out of economic and political pressures within countries. These internal pressures turn into military pressures, as the internal system tries to stabilize itself. Some countries experience these things as painful but routine events, while others destabilize or lash out. The foundation of this current cycle was Europe in the early 1990s, when the Soviet Union disintegrated and the Maastricht treaty was signed to unite the Continent. In 2001, the United States experienced the 9/11 attacks. In 2013, Xi Jinping became the president of China. It is now a generation since the last shift began, and the fault lines of the previous phase are in the final stage of change. EPM is in complete agreement with this view. It is one of the reasons why we believe the next decades will see structural changes in the areas that will affect the markets the world over, namely geopolitics and the geo-economy created by globalization. This is what investors with a longer-term perspective need to prepare for. And EPM was founded to support preparing for and adjusting to the new reality.
A six-member bipartisan group from the US Senate, led by Majority Leader Chuck Schumer, visited Chinese president Xi in Beijing yesterday, writes Nikkei. In comments after the meetings, EPM believes the Chinese again communicated their stance that the US has to change its actions towards China, if it wants real progress in the relationship. The country's top diplomat Wang Yi shared the view that the world's two largest economies should avoid conflict, and expressed hope that this visit would help the United States view China "more accurately and objectively" and bring bilateral relations back to the track of sound development. He also called for the two countries to "respect each other's core interests". This indicates, we believe, that the US can try to put diplomatic pressure China all it wants (“don’t work with the Russian”, “do more on climate change”, “treat our companies fairly”), but that the Chinese are effectively not buying it. Therefore, as we said before, if the US really wants talks between Biden and Xi on the sidelines of a leaders’ meeting of the Asia-Pacific Economic Cooperation forum slated for November in San Francisco, talks that truly improve the relationship between the two countries, then it will have to undo some of its actions in the economic and/or military sphere. Otherwise, China will continue to only be polite.
Energy Transition & Technology News
BP remains wedded to its industry-leading commitment to cut oil and gas production, its interim management has said according to the Financial Times. At the start of a two-day investor event in Denver, BP’s interim Chief Executive Officer, Murray Auchincloss said the 113-year-old energy group’s “strategy, financial frame and net zero ambition are unchanged”.
China’s wind industry is the country’s latest clean energy sector to see its success draw the attention of foreign trade officials, writes Bloomberg. Until recently, Chinese wind firms have been content to stay within their domestic market, the world’s largest, with 97% of sales in 2022 going to projects in China. That’s now changing, as manufacturers increasingly target overseas buyers, offering prices at discounts of about 20% to European and US producers. In response, the European Union’s acting competition commissioner said that Chinese wind-power could merit investigation. In EPM’s view this highlights, again, the geopolitical nature of the energy transition. China went down the path of New Energy technologies for the reason that the new energy transition could reduce its dependence on foreign fossil energy, oil and gas. Because it moved first and fast, under guidance from a facilitating government, it now dominates many of the sectors of the energy transition. The US through the IRA, and the EU through its Green deal, are trying to copy much of the Chinese “industrial policy approach”. But they are both starting far behind China. If their focus was on driving the energy transition, they would welcome cheaper and effective Chinese technology. But this would have macro-economic and even geostrategic implications deemed to be unacceptable to the West. Hence we see these measures as hindering the speed of the energy transition. In EPM’s view, this is both an example of how geopolitics drives markets today and something that we foresee will continue and grow.
Climate Politics
OPEC will this year, for the first time in history, have a pavilion at a COP gathering, writes Bloomberg. “The oil industry will be there at COP and we will be there,” OPEC Secretary-General Haitham Al-Ghais said at a Gulf Intelligence forum in Fujairah in the United Arab Emirates on Tuesday. “I hope all voices will be at the table at COP28.” EPM hopes that they are heard.
The Electrification of Transport
Japanese companies are increasing production of materials that allow electric vehicles to travel farther, writes Nikkei. Mitsubishi Chemical will increase production of substrates for next-generation power semiconductors made from gallium nitride (GaN), for use in EV motors. GaN is said to reduce power loss by more than 10% compared with silicon, the current mainstream substrate material and the company seeks to reduce costs and eventually realize mass production with a GaN crystal manufacturing method that increases production efficiency tenfold. Sumitomo Chemical, the world's largest GaN substrate manufacturer, will launch a substrate product in 2026 that doubles the current maximum surface area. The greater the surface area, the greater the number of chips that can be cut at one time, leading to increased efficiency for electronic equipment manufacturers. Shin-Etsu Chemical has also jointly developed technology with Oki Electric Industry to make power semiconductor materials using GaN at a cheaper cost. They aim to increase production volumes of the substrates by the end of fiscal 2025. Asahi Kasei is increasing production of resin materials used to coat EV batteries, as cold weather can limit performance of the lithium-ion batteries used in EVs, shortening cruising ranges. Coating a battery with a resin material similar to foam can improve insulation. Cruising range can be extended by several percent even in places with temperatures as low as minus 20 C, the company says. EPM finds this focus by the Japanese specialty chemicals companies on the EV fascinating in light of the fact that Japans automotive manufacturers have for so long eschewed battery technology and instead have focused on electrification via hydrogen fuel cells. Clearly, their specialty chemicals suppliers recognize what they should have a long time ago, namely that battery technology is the future and all other decarbonization options (Fuel Cells, hydrogen combustion) are for the moment dead ends.
China’s new-energy passenger car exports more than doubled last month, just as the nation’s growing clout in the global auto market comes under pressure from Europe and the US, writes Bloomberg. China-based automakers shipped 91,000 clean vehicles abroad in September, including pure-electric and plug-in hybrids, an increase of 107% from a year earlier. Tesla ranked top with 30,566 units sent to overseas markets from its Shanghai factory, while delivering 43,507 cars to local customers. Much of the remainder were driven by local automakers such as BYD and Shanghai Automotive Industry Corporation.
Other
Suriname plans to be first to sell the Paris Agreement carbon credits known as internationally transferred mitigation outcomes, or ITMOs. The 2015 Paris Agreement provides for international trading of reductions in greenhouse gas emissions, with companies or countries able to buy the reductions as credits to offset their own emissions. Suriname is 93% forest, and protects its forest, every additional metric ton of carbon dioxide absorbed by this forest can be packaged as one carbon credit. The country has decided to price its first credits at $30, writes Reuters, which is high compared to the so-called voluntary carbon market. Voluntary credits backed by "nature-based solutions," such as forest protection, peaked in January 2022 at $15.75 on the Xpansiv, the world's largest spot market, but have since fallen to around $3. In the EPM view, the price for carbon credits on voluntary markets is artificially low due to the massive amounts of cheating, falsification, lack of oversight, et cetera, going at these markets. The Suriname proposed price comes much closer to what we believe carbon emissions will eventually cost, if indeed the world continues its decarbonization journey.