by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Oil prices continue to trade in the lower part of the trading range despite the Saudis’ announcement of a unilateral production cut.

(Source: Barchart.com)

Commercial crude oil inventories fell 0.5 mb when compared to the forecast build of 1.5 mb.  The SPR fell 1.9 mb, putting the total draw at 2.3 mb.

In the details, U.S. crude oil production rose 0.2 mbpd to 12.4 mbpd.  Exports fell 2.4 mbpd, while imports declined 0.8 mbpd.  Refining activity jumped 2.7% to 95.8% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and then declined.  As the average line shows, we are nearing the seasonal draw period, although that pattern has become less reliable with the U.S. exporting crude oil.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $59.61.  Commercial inventory levels are a bearish factor for oil prices, but with the unprecedented withdrawal of SPR oil, we think that the total-stocks number is more relevant.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $93.27.

Market News:

• The outcome of the OPEC+ meeting was that the Kingdom of Saudi Arabia (KSA) announced a large production cut independent of the rest of the cartel. The KSA will lower its output to 9.0 mbpd, and oil prices initially rose on the announcement.  Below the surface, there are growing tensions within the cartel.  OPEC traditionally sets output quotas based on production capacity.  However, transparency on capacity is lacking, meaning that members have an incentive to overstate their capacity, which would then lead to a higher quota.  In recent years, the cartel has struggled to meet its production quotas; in fact, their new term is “target,” which is telling.  Saudi Arabia was pressing African members to reduce their stated capacity which would mean lower quotas, but naturally they resisted.
  • What’s the motive for the KSA to go it alone? We presume there are three reasons behind the decision.  First, the IMF estimates that the kingdom needs an oil price of $80 to meet its fiscal requirements.  Now, obviously, the IMF is calculating a total revenue number, so lowering production does reduce that calculation unless the price exceeds the lost revenue from the production cut.  We suspect the crown prince has a price in mind and the oil minister had to hit it, although it might be the case that the leadership has not thought through the full ramifications.  Second, we suspect MBS continues to harbor animosity toward the Biden administration.  It’s rather evident that there is a disparity between Washington and Riyadh on oil pricing.  The U.S. wants a price below $70 per barrel, while the KSA wants a price north of $80.  Higher gasoline prices are politically unpopular and this action has the potential to cause just that.  SoS Blinken is in the KSA, so the decision to cut production will surely make talks contentious.  We do note Blinken’s trip is centered on the KSA normalizing relations with Israel.  Saudi Arabia has indicated that in exchange for recognizing Israel, Riyadh wants Israel to transfer its civilian nuclear technology.  Third, the KSA may view the voluntary cut as a way to gain further control over the oil market.  If the kingdom is holding onto the bulk of the excess reserves, it will take over the role of swing producer.  It’s notable that the Saudis gave up this role in 1985, triggering a near collapse in prices.  It may be that the new generation of leadership is simply unaware of this history.  The role only works if no other nations expand capacity.  It’s interesting that the Saudis didn’t ask Russia or the UAE for cuts, which further isolates the KSA in the cartel.
  • Either the Saudis really need higher oil prices, or they are assuming that other suppliers won’t fill the gap created by the KSA cut.
  • The cartel did agree to consider lower production targets for 2024.
• China is starting a deep well project in Xinjiang which is projected to drill down 36k feet; ostensibly, this is a science project, but there is also talk about trying to engage in deep earth oil exploration. Recent comments from President Xi about oil independence are driving these sorts of projects.
• Various dredging projects off the coast of Texas are allowing larger tankers to load up Texas oil for export.
• The U.S. rig count has dropped, raising fears about future U.S. oil production. We also note that operating conditions appear to be deteriorating.  At the same time, Exxon (XOM, $105.73) claims that refracking existing U.S. wells could double output.
• Saudi Arabia is looking to invest in Iraq’s natural gas industry.
• Environmentalists are targeting LNG exports by forcing insurance companies to stop providing coverage.

 Geopolitical News:

• We have written on the de-dollarization in oil markets. We are now hearing about the downsides since Russia is apparently sitting on billions of INR and is struggling to do something with them.  India has capital controls that restrict Russia’s access to India’s capital markets, and it isn’t obvious whether the forex markets can absorb Russia’s sale of its holdings.
• There are reports that Ukraine planned the attack on the Nord Stream pipelines and the U.S. was aware of the plans. This news adds to the likelihood that Ukraine was responsible for the attack.  If so, this would likely strain relations with Germany.
• European nations and the U.S. are restarting talks on how to deal with Iran’s nuclear program. Recent reports about Iran’s enrichment program and the hardening of its research sites are leading to an attempt to return to diplomacy.
  • The U.S. and U.K. navies responded to a merchant vessel in the Strait of Hormuz that was being harassed by IRGC speedboats. Iran, meanwhile, announced a new regional maritime alliance that would exclude the U.S.  We struggle to see why nations like the UAE or Saudi Arabia would join with Iran on such a pact (given that Iran is the instigator of maritime problems in the Gulf), but the announcement is a development that we will be tracking going forward.
  • Iran appears to be backing away from the purchase of Su-35s from Russia.
  • The UAE is engaging with Iran while at the same time trying to obtain security guarantees from the U.S. The UAE may be trying to determine how far the U.S. will go in providing security to the region, and if the guarantees are seen as lacking, the emirate may decide it needs to have better relations with Tehran.
  • Iran has unveiled a missile it claims to be hypersonic. Such missiles can generally evade existing defense systems; thus, the announcement is raising concerns, especially for Israel.  In response, the U.S. has added even more sanctions on Iranian and Chinese entities involved in Iran’s missile program.
• Venezuelan President Maduro is visiting the KSA this week to discuss various investment ideas. Venezuela was under sanction, but the Biden administration has eased restrictions to reduce oil prices.  The visit, occurring just before SoS Blinken arrives in the KSA, is an interesting juxtaposition.

 Alternative Energy/Policy News:

• We have been noting the rise in resource nationalism. Mexico is becoming more aggressive in restricting foreign company access to its mining resources, which could boost prices on key metals.
• Texas is an energy powerhouse. Not only does the state produce the most crude oil but it  is also a leading producer in wind, solar, and nuclear power.  State lawmakers were considering bills to curb wind and solar projects, but those bills appear to have mostly died.  In many respects, Texas is a prime example of the “all of the above” solution to energy issues.
• Climate change concerns are causing some parts of the U.S. to become uninsurable.
• As we have noted over the past few weeks, China dominates the solar energy industry. It has been the low-cost producer of panels and other components.  However, the U.S. is now subsidizing this industry and there are signs that firms that have previously struggled to survive against China are now seeing a way forward.
• China’s BYD (BYDDY, $64.40) has moved up in the rankings of suppliers of EV batteries. It is now second only to Contemporary Amperex Technology Co. (300750.SZ, CNY, 207.30) after overtaking LG Electronics (066570.KS, KRW, 125,700).  The fact that two Chinese companies dominate the EV battery market highlights the difficulty that the auto industry will have in isolating China.  As we have noted in recent reports, China’s EV industry has rapidly become world class, putting the West in a difficult spot.  If the goal is rapid adoption of EVs for energy transition purposes, it makes more sense to import Chinese EVs; however, such a policy will likely devastate the auto sector in the West and undermine the re-industrialization process.  On the other hand, restricting imports will drive up costs and slow the energy transition.  We note that China’s export data for May was disappointing, but one bright spot has been EV exports.

(Source: Capital Economics)

• Hydrogen remains a potential replacement for hydrocarbons. However, the production of hydrogen can come from both “dirty” and “clean” production methods, which has led to a color coding of hydrogen.  The Biden administration is trying to create a regulatory path for fostering the development of the fuel that will go along with a subsidy program to boost production.  The subsidy program still requires decisions about what will be covered.  The industry wants loose standards, while environmentalists are pressing for only the “greenest” of sources.  Although we don’t know the outcome yet, this administration tends to try to split the middle on these issues, which will tend to please no specific group.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Oil prices have been volatile in front of the OPEC+ meeting.

(Source: Barchart.com)

Commercial crude oil inventories fell a whopping 12.5 mb when compared to the forecast build of 1.5 mb.  The SPR fell 1.6 mb, putting the total draw at 14.1 mb.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.2 mbpd.  Exports rose 0.4 mbpd, while imports rose 1.4 mbpd.  Refining activity rose 1.4% to 93.1% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and then declined.  As the average line shows, we are nearing the seasonal draw period, although that pattern has become less reliable with the U.S. exporting crude oil.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $59.17.  We will wait to see if OPEC+ (see Market News below) moves to push prices higher by cutting output.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $94.63.

Market News:

• The IEA notes that investment in fossil fuels has stalled, while investment in clean energy is rising steadily. If this trend continues, it means oil and natural gas prices will likely rise in the future.
• As we noted earlier this month, WTI Midland will now be part of the Brent basket. As U.S. oil becomes increasingly used globally, quality issues are cropping up which may affect export capacity.
• The debt ceiling situation does appear to be resolved. The proposed arrangement hammered out by the White House and the Speaker will still need to pass Congress, but we suspect it will.  As the details emerge, it does look like some easing of permitting did make it in the final bill.  Both the fossil-fuel and clean-energy industries are plagued by permitting  Of course, both sides want to gain permitting approval while restricting the other, but such outcomes are rare in democracies.  It is worth noting that the debt deal didn’t actually address transmission lines and pipelines, which will help its passage but neglects the key problems with streamlining permitting.
  • Last year, coal was the largest net contributor to power generation.
• Methane is considered one of the most potent greenhouse gases, and it is also the key component of natural gas. There are increasing regulations designed to reduce methane leaks which tend to lift production costs.  There are now efforts to use new technology to measure and cap unwanted methane emissions.
• OPEC+ meets this week. Last week, the Saudi oil minister warned oil speculators not to be short going into the meeting.  Initially, the market rallied, but as reality set in, it’s becoming clear that the cartel is facing internal divisions as Russia is taking market share from the other oil producers, especially in the Far East.  We will be watching to see how the cartel handles Russian output.
  • One interesting sidelight is that OPEC+ has banned the media from their meetings. It isn’t clear why, although one possibility is that the cartel expects an acrimonious meeting due to falling prices.
  • Lloyd’s of London has stopped underwriting tanker insurance on an Indian shipper that has transacted in Russian oil. Indian underwriters have stepped in to insure these fleets, but it is uncertain if the major canals will accept the new insurance as legitimate. At the same time, European insurers are growing nervous about the loss of market share to other insurers.
  • Russian oil continues to flow due to a growing network of tankers that help Moscow evade sanctions.
  • There are worries that this “fleet” of tankers is substandard. We note that Singapore has seen more tankers fail safety inspections.
• Production in Guyana is reported to be ramping up. It is projected to be a 1.2 mbpd oil producer by 2027, which would make it the largest oil producer in South America.  Managing the windfall of revenue will be a challenge for the government (although one they probably would prefer over not having the revenue).
  • Another area of potential growth is Argentina.
• Canadian tar-sand production is showing signs of increasing. Although production levels remain below pre-pandemic trajectories, the increase is notable.
• As drought spreads in China, we could see hydropower reduced, which could then lead to the use of other fuels to replace the lost power. Warm temperatures are already lifting demand.  If this continues, we expect coal and LNG demand to rise.
• To a great extent, insurance is where climate change will be enforced. Firms are already leaving the California market due to persistent wildfires.  At the same time, the insurance industry is shunning net-zero groups that have come under fire from the GOP.  Essentially, the industry will likely be driven by the assessment of risk, which could lead to changes in underwriting that would restrict development in vulnerable areas.
• Weak natural gas demand in Europe could lead to much lower prices in some markets. We view this issue as temporary, but low prices could discourage production and raise the odds of a spike in prices this winter.
• Colombia is considering a ban on fracking, and if implemented, it may create shortages of natural gas.
• Nigeria is ending petrol subsidies, which has led to mass hoarding.

 Geopolitical News:

• China continues to delay approval for another pipeline from Siberia. As we discussed last week, China appears to be getting remarkably cheap natural gas from the current Power of Siberia pipeline and is seemingly driving a hard bargain on funding a second pipeline.  Russia is in a tough spot on natural gas as its pipeline network is designed to send gas to Europe, but that market has been mostly lost due to sanctions (although not completely as Ukraine is still allowing Russian gas and oil to go through its territory).  Moscow needs to reroute pipelines away from Europe and toward Asia.  Beijing knows this, but despite promises of friendship, it isn’t willing to invest much to support Russia’s goal of moving its gas east.
• The Kingdom of Saudi Arabia (KSA) is participating in the evasion of Western sanctions on Russia by importing Russian diesel and then re-exporting it.
• One of the key benefits of a globalized world is that countries can specialize in what they most efficiently produce, which tends to lower inflation. As geopolitical tensions lead to a breakdown of globalization, nations may be forced to manufacture items that they might not be best at but still need to produce due to insecurity of supply.  China is especially vulnerable to food and energy deficiencies.  Due to its high population, limited arable land, and water constraints, China has tended to be a net importer of food.  With energy, China became a net importer in 1994.  As relations between the U.S. and China deteriorate, Beijing is vulnerable to the U.S. Navy’s ability to close off shipping lanes.  In response, China is considering new ways of securing food and energy.
• Russia has always considered Central Asia to be in its sphere of influence. In fact, during the Soviet era, the “stans” were part of the union.  These areas are rich in natural resources.  China is openly competing with Russia for dominance in this area, in part to secure key resources, and in part to exercise dominance over Russia.
  • We also note a Russian scientist working on hypersonic missiles has been detained on charges that he was selling secrets to China.
• German regulators are promoting heat pumps and looking to ban gas-fired boilers. The Greens support this idea, but other members of the ruling coalition oppose the measure.  This issue is fracturing the coalition, and although we doubt the government will fall over this measure, tensions within the coalition have been rising for some time.
• Iran has launched an alternative to the S.W.I.F.T. network in a bid to circumvent U.S. financial sanctions.
  • There are reports the IAEA has resolved some of the issues surrounding Iran’s nuclear program. However, the traces of highly enriched uranium have not been resolved.  As we noted last week, Iran may have built underground facilities so deep that U.S. conventional “bunker busters” can’t destroy them.  Iran may be close to the nuclear weapons threshold.
  • Iran has stated that it is near to unveiling an indigenous hypersonic missile.
  • Security forces in Iran claim to have uncovered a large “terrorist cell” allied with Israel.
  • Iran’s persistent interdiction of Persian Gulf shipping has prompted the UAE to ask for greater U.S. involvement. Although the Persian Gulf Arab states continue to woo China, when security concerns arise, these nations are not calling Beijing.  At the same time, China is looking to increase its economic partnership with the KSA; it is unclear if Beijing is willing to undertake the security arrangements.
  • Iran is facing a geopolitical threat from Azerbaijan. As Azerbaijan’s power rises relative to Armenia, the former could stir up ethnic unrest among the Azeri population.  Azeris are the largest minority in Iran comprising around 20% of the population.  Israel has good relations with Azerbaijan which further complicates matters.
  • Reports indicate that Iran plans to increase attacks on U.S. troops in Syria, and if true, it will raise tensions further.
  • There are reports suggesting that Egypt and Iran are mending relations.

 Alternative Energy/Policy News:

• During the first decade of this century, ethanol was thought to be a way to reduce America’s dependency on foreign oil. Regulations at the time envisioned a steady rise in the ethanol fuel mix.  However, the shale revolution reduced U.S. dependence on foreign oil, undercutting the national security argument for corn-based fuels.  Complicating matters further was that geopolitical disruption boosted grain prices significantly; using corn for fuel is seen as boosting food prices.  The Bush-era ethanol mandate has expired and it looks like the industry is being forced to defend current sales rather than boosting future use.
  • There are increasing doubts about ethanol’s green credentials.
  • Ethanol blending complicates the refining process which drives up gasoline costs. High gasoline prices are politically problematic.
• From the outset of the environmental movement, there have been tensions between the “Buckminster Fuller” wing and the “Thomas Malthus” wing. The former leans on technological fixes to environmental problems, while the latter believes reliance on technology creates an endless “treadmill” of solutions that leads to new problems where the only real solution is a decline in living standards.  This division often emerges, and the most recent instance appears to be tied to the carbon-removal industry.  The UN released a report critical of carbon renewal, because it is fearful that relying on it will curtail the drive to deploy alternative energy.  However, industry experts indicate that without direct carbon capture, meeting temperature targets will be impossible.
  • German police raided the homes of climate activists on suspicions that they were planning attacks on oil pipelines.
  • One interesting sidenote with captured CO₂ is what exactly to do with it. Although the gas has some industrial uses (in beer, for example), the amount of gas that is needed to be captured to make a difference far exceeds industrial demand.  However, one way the gas could be used, paradoxically, is to make synthetic natural gas.  By combining hydrogen with captured CO₂, you can create a clean methane that would seemingly be carbon neutral.
  • Exxon (XOM, $102.61) has made a deal with steelmaker Nucor (NUE, $132.72) to build a carbon-capture program.
• Resource nationalism is on the rise. Recently, we noted that South American commodity producers are considering nationalizing production of key metals, such as lithium and copper.  The Congo wants to change its royalty arrangements with foreign firms (mostly Chinese) on copper projects, in another example of resource nationalism.  This factor increases the attractiveness of key minerals in geopolitically safe places.  A new lithium development in Portugal has been especially welcomed.
• Clean energy proponents are pressing to streamline projects, a complaint heard from fossil-fuel companies as well.
• The president’s moratorium on solar panel tariffs survived a potential override of his veto.
• As we noted last week, China continues to dominate in EV components. Chinese battery companies are beginning to invest in productive capacity outside of China, perhaps to avoid a deteriorating geopolitical environment between the U.S. and China.  Europe is a primary target for this investment.
  • The Dutch trade minister, Liesje Schreinemacher, remarked that the energy transition is probably impossible without Chinese products. We suspect that nations will be forced to either use Chinese products, build them at home at higher costs, or forego them altogether.
  • Research is increasing on sodium batteries, although at this juncture, it doesn’t appear that sodium will displace lithium in EV batteries. Another possible alternative is lithium-phosphate batteries, which are safer and have a longer life span.
  • Toyota (TM, $139.88) announced it will build a large electric SUV in Kentucky.
  • EU leaders worry they won’t be able to match the U.S. on EV battery subsidies…which was probably Washington’s goal.
• When a new technology is developed, it takes a while for the industry to establish standards. Initially, there is a temptation for each firm to create its own standards with the hopes that they become dominant, as this adoption can create market power.  At the same time, widespread adoption usually requires a few standards so it’s easier for consumers to use the new technology.  The classic example is the VCR versus Betamax standard for videocassettes.  Although the latter was thought to be superior, the former dominated and eventually eclipsed Betamax.  Consumers would have otherwise needed two machines to handle the format.  This week, Ford (F, $12.13) announced that it would adopt the Tesla (TSLA, $197.40) NACS standard, which will allow Ford vehicles to use the 12k Tesla charging stations.  Other EV makers use the CCS standard.  By making this decision, Ford is increasing the odds that the Tesla standard will prevail.
• A German startup has won funding for a new fusion energy machine.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Oil prices are rising back into their earlier trading range of $73 to $82 per barrel.

(Source: Barchart.com)

Commercial crude oil inventories fell a whopping 12.5 mb when compared to the forecast build of 1.5 mb.  The SPR fell 1.6 mb, putting the total draw at 14.1 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.3 mbpd.  Exports rose 0.2 mbpd, while imports fell 1.0 mbpd.  Refining activity declined 0.3% to 91.7% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and then declined.  This week’s unexpected drop in stockpiles has put inventories well below seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $60.59.  Although OPEC+ is trying to stabilize the market, recession worries are clearly pressuring crude oil prices.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $94.88.

Market News:

• Despite promises to cut greenhouse emissions, the G-7 disappointed climate activists by avoiding the setting of deadlines for reducing fossil fuel use. In general, maintaining economic growth usually trumps environmental concerns.
• Left-wing legislators in Congress are pushing for a ban on U.S. oil and gas exports. Although we doubt this will get through the GOP-controlled House, such bans do occasionally come up in Congress.  Curtailing these exports would be devastating for Europe and may not necessarily lead to more domestic supply.
• Russia has admitted that discounting, in part caused by the price cap, has led to lower revenues from oil sales. Russia is also receiving less for natural gas when selling it to China.  China appears to be focusing more on Central Asia for obtaining its natural gas.
• The IMF has a blog report about the growing integration of the global natural gas market. Such integration would be bullish for U.S. natural gas producers.
• There is a growing consensus that this summer will be a hot one. We note that Canadian wildfires have led to lower Alberta oil production.  Unusually hot weather in Southeast Asia has led nations to boost energy consumption, lifting the demand for Russian energy.
  • Russia claims that lower domestic consumption accounts for its higher levels of exports and its promised production cuts.
  • New research suggests that warming temperatures will lead to depopulation in the areas most affected.
• India is looking to refill its SPR; the reserve capacity is 39.8 mb and it is looking to buy about 10 mb.
• Nigeria is opening a large refinery. Its goal is to meet domestic demand for oil products in order to curtail imports.

 Geopolitical News:

• Iran and Russia are negotiating to build a rail/shipping line from Moscow through Iran to the Indian Ocean. Shipping facilities to India are also a part of this plan.  Not only would this transportation facility bring Russia and Iran closer, but it would also make India more likely to align with the emerging China-led bloc.
  • Iran and Russia are also increasing cooperation in energy.
  • Iran’s liquid assets in its sovereign wealth fund are reportedly down to $10 billion; the fund is said to hold other assets of $140 billion. The low level of cash suggests there is little available in the fund to meet possible funding issues.
  • Iran’s religious government is facing a potential threat from within the Shiite movement. Religion and government don’t always mix very well, even in theocracies.  Religion has differing goals to governance, and even authoritarian regimes have to make compromises that don’t often sit well with zealots.  Is this development a threat to the current regime?  As with all such issues, it is hard to say, but its mere existence does raise concerns.
  • Iran dismissed Ali Shamkhani, the secretary for the Supreme National Council, which is the body that steers Iran’s security and foreign policy. He had ties to Alireza Akbari, who was deemed to be a spy.
  • In response to recent vessel seizures by Iran, the U.S. Navy is increasing patrols in the Persian Gulf.
• Iran has put its nuclear development facilities underground, and recent reports suggest that it has tunneled deeper to the point where U.S. conventional “bunker-buster” weapons would not be able to destroy these facilities. Although this may prompt Iran’s enemies to use sabotage and cyberattacks, it also could lead to the use of nuclear bunker-busters instead.

 Alternative Energy/Policy News:

• An industry report shows that one of the key factors holding back the energy transition is the lack of profitability. Although we expect this factor to improve with expansion, it also highlights the need for government subsidies until scale can be achieved.
• Another important issue was noted by David Calhoun, the CEO of Boeing (BA, $2007.00), who indicated that there is no cheap way to decarbonize air travel and doing so would likely lead to much higher prices and less air travel.
• As lithium demand soars due to EVs, Latin American nations are trying to manage the potential boom to benefit their societies. As we have noted recently, a couple of countries are considering nationalizing lithium mining.  We could also see them follow the Indonesian model with nickel—force firms to build fabrication and refining plants within their country to prevent these nations from being mere suppliers of raw material.  Chile has announced new taxes on copper miners.
  • We note that China has been aggressively buying into lithium mines worldwide to secure the metal for EVs.
• JP Morgan (JPM, $138.40) announced $200 million in support for carbon removal. Direct carbon capture will likely be necessary to maintain temperatures, and the support by this bank is a good sign for the industry.
• In the scramble to secure metals for EVs, even oil companies are looking to buy into production. Meanwhile, Ford (F, $11.82) is aggressively working to gain access to lithium.
• One of the problems with EVs is the time required to recharge batteries. At best, it’s a 20-minute process but often requires hours to fully charge a vehicle.  For EVs used in normal commuting, recharging at home usually addresses this issue.  However, for road trips, EVs are simply less convenient when compared to internal combustion engine vehicles.  One idea that has been around for a while is battery swapping.  If an EV is built to have removable batteries, it is then possible to build facilities that will house charged batteries where drivers can swap their discharged batteries for charged ones.  If such infrastructure is built, it would shorten the downtime of getting a recharged battery to that of buying gasoline.  There is renewed interest in this idea, but the problem is that if solid-state-battery technology evolves, recharging times should decline to rival gasoline refilling.
• We have been closely watching the evolution of China’s EV manufacturing. Increasingly, it looks like China has developed world-class quality vehicles at low prices.  We recommend this Sinocism podcast for details.  Chinese cars represent a serious threat to European and U.S. automakers.  Essentially, Western governments are facing a dilemma.  If they open up their markets to Chinese EVs, the energy transition will move faster and doing so will likely contain inflation, but the cost would be losing this market to China.  Or they could use tariffs and quotas to ban Chinese vehicles, slow the energy transition, and face higher inflation.  Our expectation is that the second outcome is most likely.
  • On a related note, Honda’s (HMC, $28.48) Chinese joint venture is starting to export EVs and plug-in hybrids abroad. The first sales are going to Europe.
  • Although we have been reporting on the world’s dependence on China for energy transition materials, this link has an attractive graphic that highlights China’s dominance.
  • An important element of China’s dominance is in the processing of energy transition metals. Other nations are trying to build more processing outside of China, but one of the reasons China leads the industry is that it has lower costs.  China’s processing superiority has led to vertical integration in components.  On a related note, Indonesia is trying to build a nickel processing industry to complement its preeminence in nickel mining; it’s not as easy as it looks.
• Europe was hoping to get access to U.S. subsidies for EV production. It looks like negotiations have stalled, leaving the EU at a disadvantage.
• As EVs become more prevalent in the West, ICE vehicles are ending up in the developing world.
• China is also rapidly expanding into nuclear power.
• Although fixed solar-panel arrays are the most typical deployment of these generating devices, floating panels in bays or lakes are common in Asia. We are starting to see such arrays in the U.S. as well.
• One of the problems with solar and wind power is its intermittency. Because the power doesn’t flow regularly, utilities must keep traditional power backups to meet conditions where wind or sun power isn’t available.  Obviously, batteries would solve this problem, but sadly, “metal” batteries are expensive.  We are seeing increasing reports, though, of creative ways of storing energy by either heating water or salt in the earth and using it to push a turbine or by using pumped storage.
• The EU’s joint purchasing program for natural gas is being seen as a success. By combining buying power, the Europeans have been able to purchase natural gas at lower prices than they otherwise would have been able.  Now the EU wants to branch out by using that same buying power to purchase hydrogen and other “green” materials.
• Last week, we commented on U.S. funding for carbon capture projects. One of the downsides is that if the CO₂ escapes, it can be deadly.  It is this fear that drives the permitting delays.
• California has approved 45 new transmission projects worth a total of $7.3 billion.
• In Europe, refiners are experimenting with using cow manure processed into methane to provide the energy needed for refining crude oil.
• There are constant tensions between those who aim to streamline permitting and the parties that want to prevent any sort of disruption. Interestingly enough, this opposition is not just against fossil-fuel development.  A recent example involves the Burning Man festival in Nevada, which is tangling with a geothermal development.
• Although lithium, rare earths, and cobalt dominate the headlines regarding the energy transition, aluminum is also a key metal. It is an important component for solar power and it reduces weight in vehicles which in turn improves fuel efficiency.  Despite this importance, it has been mostly neglected by policymakers.  Aluminum is sometimes called “molten electricity” due to the large amount of electricity needed to smelt the metal.  Because it takes so much electricity to make, production in the West has been falling.  This neglect may sadly lead to yet another supply problem in the future.

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