October 31, 2021
Director, US-China Energy Industry Forum
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 key for decision making. Please note that data is from open sources and comments are personal opinion
Energy security is a national security issue, but it is also a geopolitical issue. Balance of supply and demand dominates the price and vice versa. At present, the biggest news item is Biden’s effort to control the US inflation with a focus on lowering the US gasoline price, which reached to a historical for months.
The price of gasoline in the USA advanced 49.6% in the 12 months ended October compared to the 42.1% annual increase in September, according to the most recent inflation data published November 10, 2021 by the U.S. Labor Department’s Bureau of Labor Statistics (BLS).
Furthermore, Inflation over the past 12 months raced the quickest since 1990, according to government data released Wednesday, Nov 10, as U.S. consumers spent more in October for a broad range of products.
Most noticeable, energy prices logged sharp gains for the month and from a year ago. American also paid more for shelter and vehicles — both new and used. Food prices increased the same in October as in September, but they surged stronger from a year earlier.
In the headline monthly figure, U.S. consumer prices jumped 0.9% in October after gaining 0.4% in September, the Labor Department said in its monthly report on the Consumer Price Index (CPI). The CPI is a broad measure of what Americans pay for everyday items ranging from eggs to electricity.
The monthly gain matches the increase in June, which registered as the largest 1-month pick up since the 1% increase in June 2008.
“The monthly all items seasonally adjusted increase was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors,” the Labor Department’s monthly report said.
- Impact on Biden’s Presidency
Biden’s popularity has been tanking since he was inaugurated on Jan. 20, 2021. For example: Newsweek Reports: Joe Biden’s Approval Rating Remains Stubbornly Low Going into Thanksgiving BY DARRAGH ROCHE ON 11/25/21 A number of polls conducted in the days before the annual holiday have seen a poor showing for the president, who’s been in office just 10 months, amid record levels of inflation.
Publisher FiveThirtyEight tracks the president’s approval based on analysis of a wide range of polls and its own system of pollster ratings.
It found that Biden’s approval rating stood at 42.9 percent as of November 24, while disapproval of the president was 51.8 percent. That figure takes into account individual polls conducted this week.
A Rasmussen Reports/Pulse Opinion Research poll conducted from November 22 to 23 found Biden’s approval at just 41 percent and disapproval at 58 percent.
- Biden’s Crisis
There are many factors that affect President’s approval rating in the USA. Even though Biden managed to pass massive budgets to revamp the US, but the actual results will be felt by the pubic after Biden leaves office.
- Global Energy Crisis.
The crisis is rooted in soaring demand for energy as the economic recovery from the pandemic takes hold, and a carefully calibrated, but delicate, system that’s easily disrupted by weather events or mechanical problems.
An unusually long and cold winter earlier this year depleted stocks of natural gas in Europe. Soaring demand for energy has impeded the restocking process, which typically happens over the spring and summer.
China’s growing appetite for liquified natural gas has meant LNG markets can’t fill the gap. A decline in Russian gas exports and unusually calm winds have exacerbated the problem.
“The current surge in European energy power prices is truly unique,” energy analysts at the Société Générale bank told clients this week. “Never before have power prices risen so far, so fast. And we are only a few days into autumn — temperatures are still mild.”
The dynamics are reverberating globally. In the United States, natural gas prices have risen 47% since the beginning of August. The scramble for coal is also triggering a spike in the price many European companies must pay for carbon credits so they can burn fossil fuels.
Additionally, the energy crunch is supporting oil prices, which hit seven-year highs in the United States this week. Bank of America recently predicted that a cold winter could push the price of Brent crude, the global benchmark, past $100 per barrel.
Jim Burkhard, who leads IHS Markit’s research on crude oil, energy and mobility, said there’s “no immediate relief in sight.”
“There’s no Saudi Arabia for gas,” he said, referring to a single supplier that can quickly ramp up natural gas production. “This looks like it’s going to endure for the winter in the Northern Hemisphere.”
Russia could theoretically step up. Société Générale noted that faster approval by German authorities of the politically-sensitive Nord Stream 2 pipeline, which would carry gas directly from Russia to Europe, would ease significant stress.
Russian President Vladimir Putin suggested that Russia could increase its output, saying that state-owned gas giant Gazprom has never “refused to increase supplies to its consumers if they submit appropriate bids.”
But Neil Chapman, senior vice president at ExxonMobil (XOM), emphasized the short-term constraints : “Of course there’s great concern,” Chapman said at the virtual Energy Intelligence Forum. “In our industry, because it’s capital intensive, you can’t just turn on the supply.”
Crisis with a cost
The best-case scenario, according to Burkhard, is that a winter with average temperatures allows pressure to lift in the second quarter of 2022.
But severe weather in the coming months would create huge strain — particularly in countries that rely heavily on natural gas for energy production, like Italy and the United Kingdom. Britain is in a particularly tough spot because it lacks storage capacity and is dealing with the fallout from a broken power line with France.
Further complicating the picture is mounting pressure on governments to accelerate the transition to cleaner energy as world leaders prepare for a critical climate summit in November.
- USA: Biden’s ‘Self-made’ Energy Crisis and Responses
Short staffing, high gas prices, and low inventory have hit the US in waves during the past few months.
“This is not a fluke,” stated US GOP Congressman Bilirakis, “But rather, a deliberate consequence resulting from the disastrous policies and actions of the Biden Administration.” Bilirakis finds that this all goes as far back as Biden’s first days in the Oval Office when he canceled the Key Stone Pipeline project and reportedly cost 11,000 jobs.
“The catastrophic path this administration has set us on must be reversed now! America needs to once again be in the driver’s seat when it comes to our energy production. Just one year ago when fuel prices were the lowest they’d been in years, we were a net exporter of energy. We can unleash American energy, create American jobs, and lower prices at the pump by implementing the pro-growth, common sense policies of the previous administration,” Bilirakis noted.
Biden’s plan for the Heat Your Home Tax imposes a $1,500 tax per ton of methane emissions on energy producers, processors, transmission, storage, import/export, pipelines.
A. Diesel Shortage: Comments by the US news meida
There is one recurring problem with central planning: the greater the level of intervention, the worse and more widespread the unexpected adverse consequences. Just two days ago, when we reported that Beijing had imposed price controls on its coal rationing, we said that the problem with such explicit subsidies which create an artificially low price, is that they don’t address the underlying problem (too much demand, not enough supply), but instead accelerate hoarding and lead to a run on the artificially underpriced commodity, forcing spikes in another energy commodity while resulting in an even faster drain of the commodity in question, in this case coal. In essence, it’s like a giant geopolitical game of “whack a mole”.
Well, as we anticipated, in China’s attempts to defy the laws of supply and demand when it comes to coal, the world’s second-largest economy may have set its people up to relive one of the worst aspects of the 1970s stagflationary wave: gas shortages that have left many gas stations across the country running out of diesel due to supply constraints caused by the surging demand for subsidized coal.
Unsurprisingly, as the Chinese economy aggressively reopened from the covid shutdown and as the supply of fossil fuels become scarce amid China’s “green” crackdown and supply bottlenecks, demand for thermal power soared to an all-time high.
But while Beijing has sought to conserve coal, diesel, and other critical fossil fuels, consumers and gas stations in China’s Hebei Province have been left to deal with the brunt of the shortage. One told the Global Times recently that they had been “struggling with empty pumps for days and even a week” as a result of supply constraints posed by the booming demand for coal transportation and factories using diesel to generate electricity. And when there is gas to sell, gas station owners face heavy pressure to ration their gasoline.
Several gas stations in North China’s Hebei Province told the Global Times on Friday that pumps had been empty from days to even a week. Those who have just acquired supplies face a limited amount of diesel delivery to each customer, in addition to charging them a higher price.
“Each customer can only buy a fixed amount, because there isn’t enough at the moment,” an employee from a gas station in Shijiazhuang, capital of Hebei, told the Global Times on Friday. Staff from another gas station said that the diesel price had increased in recent days by 0.2 yuan ($0.03) to 7.22, but they cannot say if the price will continue to rise or there will be any diesel available in the near future.
“The diesel price hike is driven by demand for the booming transportation of bulk cargo, especially coal, which has now entered a peak season, while some factories have also increased their use of diesel to generate electricity to complete orders amid tight power supplies,” Han Xiaoping, chief analyst at energy industry website china5e.com, told the Global Times on Friday.
Since China relies on imports for 70% of its crude oil, the country’s energy market is particularly vulnerable to exogenous supply shocks that can ripple across the entire Chinese economy, creating gas lines straight from 1970s America.
The good news, according to Han Xiaoping, chief analyst at the Chinese energy industry website china5e.com, is that while gasoline may be scarce, at the very least China will make it through what’s expected to be a cold winter. “The tight situation is expected to be a temporary one that will be largely eased after the heating season this winter,” Han said.
B. Electric Power Supply
B. Home Heating: China has issued directives guarantee home heating for this winter.
- US and China Energy Trades
The US administration has not formally announced its “China Strategy,” many major issues, including geopolitics and trades, between the US and China are untouched. But the energy trades have been progressing. For China, as the largest energy importer in the world, energy security is a national security issue. The key factors for China are:
- Diversifying sources and maintain an adequate number of long-term contracts. Spot purchasing may present challenges during “crisis.”
- Building up adequate strategic reserves such as SPR and natural gas storage capacity.
- Aggressively developing indigenous resources especially shale gas and oil.
- Participating international joint ventures.
For example: Asia Snaps Up American Shale Gas to Keep Boilers, Furnaces Lit
Stephen Stapczynski Tue, October 26, 2021, 4:29 PM
Asian liquefied natural gas traders are rushing to secure shipments from the U.S., where prices are among the cheapest in the world, amid a dash to replenish supply before the winter.
Firms in China and Japan, the two biggest importers, are seeking to procure LNG specifically from the U.S., and are in discussions with exporters and portfolio players to lock in deliveries through March, according to traders with knowledge of the matter. The companies want LNG linked to the Henry Hub index, the U.S. benchmark that’s trading at a fraction of prices in Asia and Europe.
While U.S. gas prices have more than doubled this year, they still are much lower than overseas markets in large part because of the bounty of North American shale fields. That means Henry Hub-linked LNG contracts are currently cheaper than most deals linked to Brent crude or other gas benchmarks.
U.S. LNG sent to Asia this winter can turn an attractive profit, with the netback at roughly $25 to $26 per million British thermal units, according to analysis from BloombergNEF. That’s near the highest ever.
Margins are so good that a single cargo from the U.S. is exchanging hands as many as eight times, as firms are eager to resell the same shipment and get a slice of the profit, according to traders.
The Asian LNG importers are eager to buy U.S. gas on a loading basis from Gulf Coast terminals, then charter the shipping themselves, according to the traders. That’s resulted in higher charter rates in both the Atlantic and Pacific and has also stoked fears about Panama Canal congestion when winter shipments peak.
Chinese firms are also increasingly turning to the U.S. for LNG amid improving relations between the two nations, traders said. Some of the smaller importers have been encouraged to avoid procuring additional Australian supplies, and the U.S. has emerged as an alternative, according to the traders.
On the other hand, there is competition
CHINA DATA: Sep pipeline gas imports hit new record of 3.9 million mt (VS: LNG imports rise further in Sep to 6.75 mil mt)
China’s pipeline natural gas imports set a new record of 3.87 million mt in September, up 2.2% from the previous high of 3.79 million mt in August, showed latest data released Oct. 21 from the General Administration of Customs.
China’s pipeline gas imports have been setting new records in the past three months, and September was the fourth consecutive month-on-month increase since June, the customs data showed.
Stockpiling for the coming winter has driven up China’s imports of natural gas in September, especially that of pipeline gas as its prices were far lower than imported LNG, market sources said.
The surge was also driven by China’s pipeline gas imports from Kazakhstan that saw a significant month-on-month increase of 39% in September, while LNG imports from Russia saw a strong growth of 26.2% on the month to 632,449 mt, according to the data.
The average price of pipeline gas imported by China was estimated at $5.63/MMBtu in September, up slightly from $5.62/MMBtu in the previous month. Meanwhile, the average price of imported LNG, comprising both term and spot cargoes, was estimated at $11.64/MMBtu in September, up 10% month on month, and more than double the price of imported pipeline gas, calculations based on customs data showed.
China imported 6.75 million mt of LNG in September, up 1.5% month on month, the customs data showed.
Australia, Turkmenistan and Russia remained the top three natural gas suppliers to China in September.
- Geopolitics including major power competitions will be a major long-term concern and energy supply-demand challenges will last for a long while.
- However, the current global energy crisis can be attributed to this winter season. But the economic impacts can be severe because global inflation prompted by recovering from the COVID-19 pandemic may further acerbate the economic downturn.
- Further complicating the picture is mounting pressure on governments to accelerate the transition to cleaner energy for combating global warming. The fact of matter is that meeting the current consumers’ basic demand of electric power, gasoline and heating will always be the top priority.
- The bright spot is that matching US energy export with China’s energy demand can effectively eliminate some pressures from the US-China trade disputes. However, stable constructive energy trade contracts are essential.