World Energy News - 17 July 2022
Welcome to the daily Energy, Politics & Money curated news feed that features cutting edge insights into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we analyze in-depth the narrative coming from the Biden administration, that the recent visit to Saudi Arabia will soon translate into higher Opec production.
Also, we examine the strength of the US dollar and what this is likely to cause, both in on-the-ground economic effects and central bank monetary policy.
Over in Europe we provide more insight into how its energy crisis is developing (spoiler alert: not good!).
And in addition to some interesting information on the subject of the energy transition technology, we provide insight into the United States’ efforts to establish a legal footing for is climate ambitions.
General Energy News
The narrative of the Biden administrations remains that the Gulf countries will come to the rescue at the American pump as reported by Reuters.
We see this as mostly political in nature because Saudi Arabia, the UAE, Kuwait, etc, are unable to add the barrels onto the market that would really drive crude prices down back into the $60 – 80 range anytime soon. A reality of their production numbers that was picked up by Julian Lee at Bloomberg a few days ago. Lee says “OPEC producers will need to pump crude at the fastest pace in five years in 2023 if they are to balance oil supply and demand. Capacity constraints suggest they may struggle.”
Reuters also reports that Crown Prince Mohammed Bin Salman has already talked down the expectation, saying the Kingdom has a current production capacity of 12 million barrels per day (regarding which questions continue to linger as to how long exactly this production could be maintained) and that the targeted 13 million will not be reached before 2027.
For the next few months, therefore, it will be events affecting oil demand that will drive crude prices, i.e. the speed and depth of the likely global recession. We agree, therefore, with the header of a Bloomberg analysis of the trip, “Biden Left Awaiting Benefits After Fist Bump in Saudi Arabia”. On the oil / gasoline front, the wait for relief will be significant. On the other hand, real progress appears to have been made as far as the United States’ ambition to integrate Israel into the broader Middle Eastern economy.
For those who believe the current separation of Russia from Europe is temporary only, according to the Financial Times, Mongolia expects Russia to begin construction of the “Power of Siberia 2” gas pipeline through its territory to China within two years, as Moscow moves to connect its Europe-supplying gas fields to Asia for the first time. Power of Siberia 2 will connect Siberian fields that currently supply Europe and connect them to China.
Energy Transition & Technology News
Investment in private nuclear fusion companies has more than doubled in the past year and eight new companies have been founded, bringing the total to around 33.
Nikkei Asia writes, Japan’s steelmakers have unveiled a detailed timeline through fiscal 2030 for developing technology that can make high-quality steel using hydrogen and electric furnaces. It is expected to cost 10 trillion yen ($72 billion), a large part of which will need to come from the Japanese government.
Nikkei Asia reports that Japanese startup Emulsion Flow Technologies has developed an EV battery recycling process that is 100 times faster than the conventional approach. EFT's method creates a flow that carries away cobalt, nickel and other metals in a watery solution on tiny droplets of oil. The droplets coalesce quickly, allowing the metals to be collected. As the process is said to attains 99.99% purity for the extracted metals, they can be directly used to make new batteries The company is working on commercializing the process during 2023.
On the subject of recycling, Forbes reported on Tuesday last week that Redwood Materials, the battery recycling company founded by Tesla cofounder JB Straubel, has agreed to partner with Volkswagen and Audi to join its electric vehicle battery recycling program. It will work directly with more than 1,000 VW and Audi dealerships in the U.S. to collect and ship used EV batteries to its facilities for recycling. Redwood estimates it can recover over 95% of the high-value metals in those lithium-ion packs, including nickel, cobalt, lithium and copper. Those materials will then be used for new battery anodes and cathodes that Redwood said it will supply to U.S.-based battery manufacturers.
The Macro Environment (economics & geopolitics)
We spent quite some time looking at “contagion risk” in the developing world, as energy and food price inflation, a global recession and rising US dollar combine on the back of 2 years of Covid lock downs to create a perfect storm. Today, Bloomberg picks up on the story, highlighting “The dollar’s relentless rise is threatening to trigger more outflows from Asia’s emerging-market shares”. Asian currencies have slumped to their lowest in more than two years and foreign investors have taken $71 billion out of stock markets in emerging Asia outside China so far this year and doubling the outflows reported in 2021.
More broadly as to the impact the rising US dollar will be having globally, in an opinion piece Bloomberg posits that “Against the backdrop of higher-than-expected inflation and still-elevated commodities prices, the concern is that we’re in for a dollar ‘doom loop’ like never before”. This “doom loop” sees the dollar strength adversely affecting the global economy, which then causes a further “flight” into the greenback, and thus worsens the global economic situation. As to whether this will happen, and by how much, the key question is to what extent the stronger dollar reduces the Fed’s inclination to go even bigger on interest-rate hikes in the coming months. If U.S. inflation is eased, by the strengthening dollar, perhaps we won’t see the 75 basis point rate hikes currently supporting the dollar.
The Financial Times looks at what central banks could do to stop this vicious circle, and observes it has left them competing with each other about “who can do the highest rate hike”, which the paper calls a “reverse currency war”. Of course, this will increase the chances of a severe recession over coming months.
Further on the macro front, at the beginning of this year we identified China’s Net Zero Covid strategy as one of the main risks facing the global economy.
Unfortunately, the global economy now has worse things to worry about.
Nevertheless, China and Covid remain a problem for global aggregate demand and the global supply chain. As we reported yesterday, Chinese economic growth came to a halt during 2Q as result of precautionary measures to fight Covid. Bloomberg today reports that things are not looking much better for Q3, as “New Covid cases in China continued to climb as outbreaks in some regions widened, with authorities in Shanghai saying the situation in the city remains severe.”
Nikkei Asia reported that another risk facing China are its high level of debt. Its opinion piece on the subject entitled “China's debt bomb looks ready to explode” is a bit sensationalist, but does contain valuable insights such as “The chances of such a financial meltdown are much higher today than before. One of the reasons that China has avoided a financial crisis in the last decade is that its economy managed to grow at a reasonably high rate, averaging 6.8% a year from 2011 to 2020. A faster-growing economy normally makes it easier to manage or even conceal the debt burden. But as the Chinese economy is now slowing down rapidly, in part due to Beijing's zero-COVID policy, the debt bomb is ticking much louder.”
Together with the troubles brewing in China’s real estate sector, which were discussed in detail yesterday, in which Chinese regulators are trying to manage the situation by urging banks to extend additional loans to developers. This is clearly something to keep on your radarsreen.
Special features – The Global Energy Crisis
An opinion piece in the Financial Times observes that during the current closure of Nordstream 1, “Russia could have redirected its gas via alternate routes such as Yamal or the Ukrainian transit pipeline, and it has not.”
So clearly, geopolitics are at play.
The consequence is that Germany is falling behind on its effort to fill it gas storage facilities for creating reserves for winter. This creates problems today in the form of electricity prices that leaves European industry uncompetitive locally and globally; and it sows the seeds for even greater problems - in the form of actual gas shortages - as we head into winter.
The opinion piece calls for solidarity across Europe with Germany, which makes perfect sense since “if Germany sneezes Europe catches a cold”.
At the same time, it highlights that not much seems to be happening in this area, as in typical European Union fashion (almost), most governments are choosing to ignore the problem (using the “we will be fine” strategy) or approach it independently (using “we will just secure what little we might need elsewhere” strategy). These strategies ignore the fact that every other European government will be doing the exact same and thereby they will collectively suffer the consequences.
With each day that we move closer to winter, we grow even more pessimistic in our outlook for the European economy.
Other
In other news today, according to Reuters, the Biden administration’s efforts to get something of a “Net Zero” policy going in the United States hit a big obstacle as West Virginia Senator Manchin refused to support the Administration’s proposed legislation.
Without legislative support and backing for policies proposed by the Biden administration (which can be found here) are just paper. Biden will have to resort to executive orders to make progress, but his ability to do so depends on the outcome of the coming mid-term elections. Thereafter, the ability of any executive order to truly “stick” and have an impact, will depend on who enters the White House in 2024. Consequently, we do not expect policy to drive any significant change in the United States’ economy over the coming few years.
And in case you are interested in history and family intrigues, especially when involving oil and billions of dollars, the Financial Times has a piece on the family of the Sultan from Sulu who are suing Malaysia for US$15 billion over oil revenues.