World Energy News - 19 July 2022
Welcome to the daily Energy, Politics & Money news feed specially curated for you for Tuesday, 19 July 2022! We feature cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, in addition to the daily energy news we look in detail at the declaration of Force Majeure by Gazprom for European customers. As we’ve been warning, the implications for Europe will be immediate and devastating! But eventually, they will be felt the world over, in the form of higher competition over remaining sources of energy resulting in higher prices across the board for consumers and industry.
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General Energy News
Reuters summarizes the causes responsible for the wild ride in oil prices over past couple of days – rising $5 on Monday before falling again on Tuesday - as being the result the whipsaw effects of concerns about supply as Western sanctions on Russian crude, how fuel supplies have disrupted trade flows to refiners and end-users, and growing worries that central bank efforts to tame surging inflation may trigger a recession - how deep is yet to be determined - that would cut future fuel demand.
Going beyond the daily price movements, Reuters’ deep dive highlights the fact the physical market itself remains tight. They note that although oil prices have dropped by about $15 a barrel over the past 10 days as the threat of recession clouds the demand outlook, they believe most of the price drop is related to financial speculation.
Beyond crude oil, Bloomberg reports on a piece of recent analysis by Wood Mackenzie that examined the impact of continued Covid lock downs in China and how the policy is likely to significantly affect winter LNG demand. It predicts the lock down policy will likely to lead to a record drop in liquefied natural gas imports this year.
In the renewable energy area, according to Bloomberg’s New Energy Finance (BNEF), the cost of new-build onshore wind has risen 7% year on year and fixed-axis solar has jumped 14%. Consequently, the global benchmark levelized cost of electricity, or LCOE, has temporarily retreated to where it was in 2019. These cost rises are linked to the general inflation trend affecting materials, freight, fuel and labor.
Energy Transition & Technology News
As global aviation recovers from the devastation caused by COVID-19, Nikkei Asia reports that Asian airlines are now also testing the use of lower-carbon fuels to limit their greenhouse gas emissions. We have highlighting bio-fuels as a major business opportunity for a number of years already for the simple fact that there won’t be enough of it to satisfy future demand from aviation and maritime industries. Bio-fuels from waste (either household or agricultural) do tick all sustainability boxes, but we foresee significant social push back against bio-fuels produced from dedicated agricultural products, such as palm oil, because this type of farming has history of causing deforestation (with the knock on effect of increased carbon emissions and lowered O2 production) and increases the cost of food products.
The Macro Environment (economics & geopolitics)
Yesterday we looked at development in the China real-estate market. Over at NewNormal, Paul Hodges examined the subject closely (and highlights the importance of this topic, “China has relied on debt to fuel growth, instead of raising wages to support domestic consumption. Beijing kept incomes low and launched what became a $44tn debt-fuelled real estate bubble. This led to a construction boom, and boosted car sales etc as during the subprime bubble in the USA. And every time the bubble threatened to burst, Beijing added more $tns. But now, the bubble is starting to deflate, as the zero-Covid policy cripples the economy.”
We have our eye on a few macro-trends that, as we see it, will fundamentally drive global markets over the medium- and longer-term. Among these is the trend of significant population declines in the world’s most advanced economies. In a Bloomberg opinion piece analyzing the UN’s World Population Prospects 2022 report, it concludes that for China, “The disappearance of two-thirds or more of the working-age population envisioned for China is unprecedented in the modern world” and “The most dangerous trajectory in world politics is a long rise followed by the prospect of a sharp decline.”
The Electrification of Transport
According to Nikkei Asia, as part of its venture into electric transportation and autonomous driving, Sony is developing a new sensor for its self-driving autonomous vehicle initiative. The chip will be designed to consume 70% less electricity thereby reducing the voracious appetite for power autonomous systems and help to extend electric vehicle range.
Special features – The Global Energy Crisis
Slowly but steadily Russia is tightening the thumbscrews on Europe in response to its sanctions policy. Most recently, in a letter dated July 14, Russia's Gazprom told its European customers that it cannot guarantee gas supplies because of “extraordinary” circumstances, according to a letter seen by Reuters. This news comes as Nord Stream 1 - the key pipeline delivering Russian gas to Germany and the rest of Europe - is undergoing 10 days of annual maintenance that is scheduled to conclude Thursday (if the maintenance work proceeds according to plan), adding to fears in Europe that Moscow may not restart the pipeline at the end of the maintenance period in retaliation to European sanctions imposed on Russia.
The Financial Times builds on the Gazprom story arguing something we’ve been saying for weeks, namely, that while current rates for electricity make European industry uncompetitive globally, an actual end to Russia gas supplies will bring utter devastation to Europe’s most important economy - and consequently to the rest of Europe. According to FT, “Should flows cease, most economists expect the Eurozone’s economic powerhouse to experience a severe fall in output. No gas this winter would, according to analysts at Swiss bank UBS, trigger a ‘deep recession’ with almost 6 per cent wiped off GDP by the end of next year. The Bundesbank has warned that knock-on effects on global supply chains would ‘increase the original shock effect to two-and-a-half times the size’.”
Facing this prospect, the European Union is trying to “save what still can be saved”. Brussels is preparing to tell EU members to cut gas consumption ‘immediately’, warning that without increased conservation the entire continent risks running short of the fuel this winter as Russia restricts (if not cuts off) supply.
Beyond the immediate energy crisis in Europe, the Financial Times examined the EPA (Environmental Protection Agency - USA) National Emissions Standards for Hazardous Pollutants (NESHAP), created in 2004, and how they could affect stationary combustion turbines underlying the US’s LNG industry. In worse case analysis, it is predicted that NESHAP could remove up to 50% of US LNG supply. We believe that this prediction is unlikely because of the significant damage it would do to global gas markets, especially amidst the current Europe-Russia gas spat.
Efforts to reduce dependency on Russian gas based on using nuclear generated power faces a big challenge. Russia is also the world’s largest manufacturer of nuclear fuel (with 36% market share) and given the current state of relations with Europe, it may be in no mood to supply the Europeans with the necessary fuel. The Nikkei Asia reports Russian state-owned nuclear energy corporation Rosatom said it controls a 36% share in the global enrichment services market. Urenco Group, based in the U.K., is the runner-up at 30%. France's Orano holds 14% while Chinese enterprises control 12%.
Other
Nothing to share today.