The EU promises to block most Russian oil by 2023, kicking the rig down the road
On May 30, the EU agreed to an embargo on Russian oil – kind of. Member states announced that by the end of the year, they intend to ban all Russian oil arriving by sea, though not pipeline. Poland and Germany have pledged also to end pipeline imports, meaning that a total of 90 percent of Russian oil will be blocked by the end of 2022. This deal constitutes a key concession to Hungary, as well as Slovakia and the Czech Republic, which rely on pipeline gas. It also means paying Wednesday for a press conference today: There are a solid six months left in 2022; this ban is unlikely affect the immediate of Russia’s offensive – and by the 2023 hits, a Europe facing the arrival of winter risks backing down.
That risk is all the greater because efforts to develop alternative production continue to stall. In the US, oil majors and publicly listed drill rig operators have largely stuck to capital discipline; the players that have increased drilling since March 2020 are predominately smaller and private operators. Moreover, OPEC+ countries have consistently missed their monthly supply targets. Their decision this week to boost production will only offer modest relief. And fuel rebates in Germany and US states are incentivizing fuel use instead of reduction.
And an energy squeeze in Australia offers a taste of what’s to come
Meanwhile, Australia offers a glimpse of the energy dilemmas that risk defining winter 2022/23. What Australia’s treasurer called a “perfect storm” of factors—energy price spikes, outages at coal-fired power plants, a cold snap, and tight global competition for LNG—now threatens to spiral into an energy crisis; the country is facing a potential natural gas shortage as winter dawns.
This is particularly striking considering that Australia is the world’s top LNG exporter. But European countries have snapped up available floating storage and regasification units (FSRUs) to replace Russian pipeline gas. This leaves Australia – which needs LNG imports for major cities far from its main gas fields – without regasification capacity and scrambling to get enough imports of the fuel.
When car companies become space companies
Chinese carmaker Geely this week launched its first set of nine low-orbit satellites, the beginning of a network that will enable more accurate navigation for autonomous vehicles. Geely hopes to have another 63 satellites in orbit by 2025, and eventually to reach a constellation of 240. This makes Geely the second major automaker to have an associated space business after Tesla: Elon Musk owns both Tesla and SpaceX; the latter has already sent 2,000 satellites into orbit for its Starlink network. Japanese carmaker Honda plans to enter the space business by 2030, too, including by launching small satellites to gather location data for self-driving cars.
Industrial robot orders grow in the US; will production follow?
US factory floors are seeing a lot more workplace robots. Orders for industrial robots in the United States jumped 40 percent year-on-year in the first quarter, according to the Association for Advancing Automation. That comes on the heels of last year’s strong growth, which saw a 28 percent increase in robot orders compared to 2020. Much of that jump came from industries other than the auto sector, suggesting that a broad range of manufacturers are embracing (or at least willing to experiment with) robots. This is by no means unexpected in an industry 4.0 environment. But it does suggest that moving forward, the continuing labor squeeze might not be as significant an obstacle to production as has been assumed. And this could serve as a leading indicator that US-based production is indeed on the rise.
European inflation hits a record high
Germany, Europe’s largest economy registered a decades-high inflation rate of 8.7 percent in May – significantly higher than what analysts expected – driven by surging food and energy costs as a result of Russia’s invasion of Ukraine. The German finance minister called inflation an “enormous economic risk” and warned against a wage-price spiral. And it’s not just Germany: Inflation across the eurozone hit a record high of 8.1 percent in May. Should the EU’s embargo of seaborne Russian oil imports come into effect, it will only add to inflationary pressures, especially on Poland and Germany which have pledged also to cut pipeline imports.
What to watch for: The European Central Bank meets next week and will likely confirm plans for a 50 basis point rate hike in July. The big question is whether the ECB can succeed where the Fed risks failing, and engineer a soft – or at least “softish” – landing.
China’s Pacific Islands pact has flopped – but Beijing’s influence campaign has certainly not
Beijing’s attempt to push a regionwide Pacific Islands deal covering cybersecurity, law enforcement, and trade was dealt a setback this week when the 10 Pacific nations decided not to sign the Chinese proposal. That decision comes after the Federated States of Micronesia warned that inking the pact could inflame geopolitical tensions, catching the region in the crossfire of the US-China competition.
But this may be a pyrrhic victory for the United States. Multilateral deal or not, China has managed vastly to increase its influence in the strategically significant region over the past decades, and decade in particular, primarily through bilateral relations and investments. And the US has offered little in the way of alternatives: Security assistance, the tool the US most frequently uses, only goes so far compared to cash; the recently unveiled Indo-Pacific Economic Framework is light on substance and commitment, neither a trade deal nor a security pact.
Will Germany’s investment guarantees start shifting away from China?
Germany has refused to grant investment guarantees to Volkswagen for its projects in China, citing human rights violations in Xinjiang. This means that the automaker, which has continued to defend its operations in Urumqi, will have to cover its own financial risks. Other German firms should take note: the Federal Ministry of Economics and Technology said it will withhold future guarantees from any investments in China that are located in Xinjiang, or have ties to entities there.
This suggests a tightening alignment on the Xinjiang question between Europe and the US, where the Uyghur Forced Labor Prevention Act will go into effect later this month. It could also suggest that Berlin is reassessing its approach to guarantees for, and therefore incentivizing, investments in China: In 2021, 75 percent of the 2.6 billion euros in guarantees that Berlin awarded went to projects in China.
Caught between food and energy crisis, Egypt is both too big to fail and on the brink of failure
Egypt is one of the world’s top wheat importers. That makes it acutely vulnerable to soaring food prices, and consequently shortages and political upheaval. At the same time, Egypt is now a top 10 exporter of LNG after reopening a long-idled terminal last year, making it an important source of energy as Europe seeks to cut reliance on Russian fuels. Together, these two attributes put Egypt at the heart of complex upheavals unleashed by the Russia-Ukraine war. Analysts say Egypt’s trade position makes it “too big to fail” for Europe and the Gulf. But for now, the country stands on fragile footing: It is heavily indebted and susceptible to external shocks; the specter of food shortage makes it susceptible to internal turmoil as well.
China’s youth unemployment soars; will it last, and does it even matter?
Unemployment among China’s urban youth ages 16 to 24 hit a record 18.2 percent in April as COVID-19 lockdowns wreaked havoc on the nation’s economy. For government officials, this is cause for concern: Discontent among digitally savvy urban youth, reeling from the double hit of lockdowns and poor economic prospects, could bubble over into large-scale and politically destabilizing protests. And the joblessness could get worse should China’s economy slow down. Already, there have been numerous reports of large layoffs at tech firms. The property market isn’t looking rosy, either. And nearly 11 million college grads will flood the labor market this spring.
That said, China’s lockdowns appear to be easing – including in Shanghai. And Beijing’s hold over its domestic population is far tighter than generally recognized. Plus, government investment in infrastructure projects over the coming months is likely to provide no small amount of employment.