Prof. ST Hsieh
Director, US-China Energy Industry Forum
February 28, 2022
Introduction: This monthly newsletter is intended to be a monthly update on US-China interactions on energy and environment industry sectors. We believe that accurate, quantitative, updated data is a key for decision making in any businesses, especially in global energy business. Please note that data is from open sources and comments are personal opinions.
Energy security is a national security issue, but it is also a geopolitical issue. Balance of supply and demand dominates energy prices and vice versa. We pay special attention to Liquified Natural Gas (LNG.) LNG has been around for more than 50 years. However, LNG becomes a major global commodity recently. The driving forces are:
- Under the pressure of global climate changes, natural gas is designated as a global transition fuel while coal and petroleum will be phased out under national plans.
- Shale oil and gas revolutions in the US during the last decade have made abundant much more than US domestic needs. The US became the world largest energy producer and a net energy exporter several years ago. The US continent is buffeted by the Pacific Ocean on the west and Atlantic Ocean on the east, for US natural gas to reach major global consumers in Europe and Asia, LNG is the only way out. The US becomes the world’s major LNG exporter nation equipped with largest LNG export capacity.
- China, the largest energy consumption nation in the world has decided to import natural gas for protecting environments. It has been dependent on pipeline gas, but now China is the largest LNG importer. US-China LNG trading, along with petrochemicals serves a natural match for reducing the trade deficits.
Monthly Updates One:
February 2022 will go down the history as a monumental month, because Ukraine war started on February 24, 2022. The war is still unsettled but it already caused huge human sufferings. Ukrainians are the obvious victims, but the war and sanctions imposed by the US and allies against Russia impact the global economy and no one is spared. No one knows for sure how and when this war will conclude. It is also too early to declare winner or loser yet, but most likely there is no winner.
But we do know the root cause of this terrible war: Europe’s over dependence of Russia’s energy supply especially natural gas. It is not Russia’s fault. It is also clear that each nation in Europe has different level of dependence. For example, German imports Russia natural gas for about 50% of her needs. German also joint ventured with Russia and built the Nord Steam II gas pipeline at a cost over US$11B. Only after the Ukraine war broke out, German has to agree holding the pipeline on hold. Ukraine was the major gate way for Russian Gas to Europe and benefitted significantly for years. A major flash point for this Ukraine-Russia war was that Russia decided to bypass Ukraine for natural gas supply to Europe via other routes such as the Nord Stream II pipeline.
Monthly Updates Two:
Russia-Ukraine confrontations intensified almost one year ago, after Biden took office and his administration became actively engaged. At that time, the key uncertainty is the continued global threat of COVID-19 variant Omicron. Despite high inflation and supply chain disruptions, US consumer spending is hot at that time.
Rising US domestic gasoline price was already a major concern. However, US gasoline price was not closely pinned to the global crude oil price. The reason is that US domestic oil production capacity is sufficient for exports already. It does not mean that US oil price is de-linked from the global market, but US gasoline price also depends on domestic refinery capacity and transportation/distribution. Unfortunately, the Ukraine war has caused major interruptions on global market, especially energy prices skyrocket after the war began and no one is spared. The world used to be occupied by the COVID-19 Pandemic, now it is the war and inflations.
Monthly Updates Three: Some data as of February 28, 2022
- The goods trade deficit jumped 7.1% to an all-time high of $107.6 billion last month. Imports of goods increased 1.7%, led by food and motor vehicles. There were also large increases in imports of industrial supplies, capital and consumer goods. Imports of other goods, however, tumbled 15.3%.
- OIL (BRENT) Commodity
US$98.85bbl (on January 3, 2022, it was US$78.98 bbl)
OIL (WTI) Commodity
US$90.2 bbl (on January 3, 2022, it was US$76.8 bbl)
- This could, in turn, create problems for Europe, which is still grappling with tight gas supply and dangerously low inventories, because Chinese LNG is trading at a premium to the Asian benchmark, and traders might be tempted to snatch up LNG cargos to sell to China.
But the Ukraine war completely re-set the LNG market.
- War in Ukraine has fundamentally transformed the global energy market. Europe nations are scramble to secure energy supply so much so that fossil energy and nuclear energy are not taboo anymore. However, it takes political will and public consensus. Further, building energy infrastructure such as LNG terminals, takes major investment as well as time. People’s memory can be very short, after the Ukraine war is concluded somehow, how many projects will be built is anyone’s guess.
- Europe, historically favors liberalized market, focused on LNG spot contract because it is flexible and often lucrative. To the extent that long-term LNG contract with destination clause has been completely dismissed. Now, with the ongoing Ukraine war, long-term LNG contract is favored.
- US and her allies have levied unprecedent economic sanctions against Russia, including kicking Russian banks out of the SWIFT system. However, so far, Russian energy industry is spared. Any sanction is a two-way-street, it is not cost free. For example, without going through the SWIFT system, Russia-Europe energy trades will be more costly and time consuming.
- US led sanctions included sanction against Putin personally. It is a personal insult without any real impact on Russia. It will only make the peace-talk so much more difficult. It may even prompt Putin to cutoff energy supply to Europe completely, then what?
- Biden has announced that “US and Russia relation is completely ruptured.” That may be true, but there is only on global village, any war will end, but how do we achieve peace again?