It’s possible that I shall make an ass of myself. But in that case one can always get out of it with a little dialectic. I have, of course, so worded my proposition as to be right either way (K.Marx, Letter to F.Engels on the Indian Mutiny)
Friday, February 10, 2023
South African Energy Crisis Triggers Declaration Of State Of Disaster
South Africa is now in a “state of disaster,” according to South African President Cyril Ramaphosa, who made the declaration on Thursday due to the country’s raging energy crisis.
President Ramaphosa referred to the energy crisis on Thursday in the annual State of the Nation Address as “profound,” adding that the seeds of it “were planted many years ago.”
The power cuts—or rolling blackouts—by South Africa’s state-run utility Eksom are daily and are reportedly the worst in its history. The blackouts have hit businesses and industry in the country, and are expected to cut into the country’s economic growth by 2 percentage points.
South Africa has experienced blackouts every day so far this year in what some are calling “a permanent new reality”. It has suffered some form of chronic power outages for the last 15 years. Food retailers, wineries and vineyards, and some in the industry are turning to costly measures to make up for the power outages such as emergency generators and solar panels.
The government has been called upon to intervene before shortages of food and medicine and other essential goods take hold, and cautioned that the state of disaster would not resolve the energy crisis.
South Africa’s energy crisis is largely brought on by supply shortages due to aging coal-fired power plants. Eksom has 14 coal-fired power stations responsible for supplying 80% of South Africa’s power. Many are old, most have not been maintained properly, and the company is deep in debt. South Africa has grand plans to retire 12GW of its coal-fired power fleet within the next seven years, but the country’s newest plants, Kusile and Medupi that were fired up last year were plagued with severe cost overruns and are still not operating at full capacity.
Russa’s invasion of Ukraine has upended global trade.
Geopolitical risk has a strong correlation with GDP per capita, meaning that developing economies typically have less stability.
As a result of the Russia-Ukraine war, the World Bank estimates that “world trade will drop by 1%, lowering global GDP by 0.7% and GDP of low-income economies by 1%.”
The Russia-Ukraine war highlighted how geopolitical risk can up-end supply chains and weaponize trade. More precisely, the war led to trade sanctions, a food crisis, and energy shortages.
In this graphic from The Hinrich Foundation, the third in a five-part series on the sustainability of trade, Visual Capitalist's Jenna Rossexplores how geopolitical risk differs by economy. It pulls data from the 2022 Sustainable Trade Index, which The Hinrich Foundation produced in collaboration with the IMD World Competitiveness Center.
Breaking Down Geopolitical Risk
Geopolitical risk has a strong correlation with GDP per capita, meaning that developing economies typically have less stability.
The following table shows how geopolitical risk breaks down for select economies that are covered in the 2022 Sustainable Trade Index. A lower number indicates less stability, while a higher number indicates more stability.
Economy
Geopolitical Stability
Pakistan
5.2
Myanmar
9.9
Bangladesh
16.0
India
17.0
Mexico
17.9
Philippines
18.9
Papua New Guinea
20.3
Russia
20.8
Thailand
24.5
Indonesia
28.3
Ecuador
34.4
China
37.7
Peru
38.7
Cambodia
41.0
Vietnam
44.8
Sri Lanka
45.3
U.S.
46.2
Chile
49.1
Hong Kong
50.0
Malaysia
50.9
UK
61.3
South Korea
62.7
Laos
69.3
Taiwan
72.2
Australia
73.1
Japan
87.3
Canada
90.1
Brunei
90.6
Singapore
97.2
New Zealand
97.6
Source: World Bank, based on the latest available data from 2020. Values measure perceptions of political instability and violence, which are a proxy and precursor to geopolitical risk.
New Zealand has the highest level of stability, likely supported by the fact that it is a small nation with no direct neighbors. The country has taken steps to repair relationships with Indigenous peoples, through land and monetary settlements, though challenges remain.
The U.S. has moderate stability. It has been impacted by increasing political polarization that has led to people having lower trust in institutions and more negative views of people from the opposing party. As the world’s largest economy, the U.S. also faces geopolitical risk such as escalating tariffs in the U.S.-China trade war.
Russia has one of the lowest levels of stability. The country’s invasion of Ukraine has led to war along with economic roadblocks that restrict normal trade activity. For instance, sanctions against Russia and blocked Ukrainian ports led to a food shortage. The two countries supply a third of the world’s wheat and 75% of the sunflower oil supply.
The Impact of Geopolitical Uncertainty on Trade
Geopolitical risk can lead to civil unrest and war. It also has economic consequences including trade disruptions. As a result of the Russia-Ukraine war, the World Bank estimates that “world trade will drop by 1%, lowering global GDP by 0.7% and GDP of low-income economies by 1%.” A separate study found that Pakistan’s history of political instability has negatively affected trade in the country.
Of course, geopolitical risk is just one component of an economy’s trade sustainability. The Sustainable Trade Index uses a number of other metrics to measure economies’ ability to trade in a way that balances economic growth, societal development, and environmental protection. To learn more, visit the STI landing page where you can download the report for free.
By Zerohedge.com
Fair Or Not, Big Oil Has To Deal With Public Opinion
Big oil companies have reported record profits in 2022.
Commodity analysts at Standard Chartered have pointed out that the oil majors in particular are facing one of their greatest tests due to a host of conflicting objectives.
StanChart has warned that Big Oil’s new playbook entailing maximizing the short-term share price by holding back investment and minimizing risk-taking is hardly an ideal long-term strategy.
The energy markets are currently going through a seismic shift only rivaled by the global energy crisis of the 1970s. Commodity analysts at Standard Chartered have pointed out that the oil majors in particular are facing one of their greatest tests due to a host of conflicting objectives, some of which are mutually exclusive while others demand tradeoffs of some sort:
Incessant calls especially by western governments to expand oil and gas output in a bid to lower consumer prices.
To act as a revenue source for government finances when needed.
Accelerate the energy transition and net zero objectives.
Promote energy security in all its forms.
According to StanChart, the reaction to recent quarterly results of oil majors “would include an impression that majors are failing to increase output”.
The reaction also seems to suggest that the wider sentiment is that Big Oil is also lacking in its contributions to the energy transition, while at the same time not paying a fair amount of tax. Instead, the reaction is that Big Oil prefers “to buy back their own shares or increase dividends rather than to be dynamic or innovative”.
Standard Chartered views some of this “synthesis” as “unfair”, but because it is so prevalent, it demands that Big Oil proceed with greater awareness.
The commodity experts have a valid point. We are halfway through the earnings season, and the energy sector has once again emerged as the market’s best performer with earnings growth clocking in at 57.7%, multiples higher than the S&P 500 average of 4.3%. Five Big Oil companies have returned their Q4 2023 scorecards, with Exxon Mobil (NYSE: XOM), Chevron Corp. (NYSE: CVX), BP Plc (NYSE: BP), Shell Plc (NYSE: SHEL) and TotalEnergies (NYSE: TTE) raking in combined profits of $196.3 billion, more than the annual economic output of 156 countries. The Biden administration is clearly not pleased with the turn of events:
“You may have noticed that Big Oil just reported record profits. Last year, they made $200 billion in the midst of a global energy crisis. It’s outrageous,” U.S. President Joe Biden said in his State of the Union address on Tuesday. The president’s polemic appears justified considering that Big Oil is hardly using much of its windfall profits to expand production, preferring instead to distribute their excess cash to shareholders in the form of dividends and buybacks.
Source: Standard Chartered
Windfall Taxes
High oil and gas prices have translated into high fuel prices for consumers, drawing the ire of the public and governments everywhere and sparking populist moves in response.
Back in October, President Biden threatened to slap a windfall profits tax on American oil and gas companies if they fail to use their "outrageous" bonanza to expand oil supplies in a bid to lower fuel prices. A windfall tax is a one-time surtax levied on a company or industry when unusual economic conditions result in large and unexpected profits. However, Biden is yet to follow through on his threat but instead American companies have to face a different beast: buyback tax.
As part of the new Inflation Reduction Act that President Biden signed in August is a new 1% tax on corporate share buybacks. Oil and gas companies will bear the brunt of the new tax because they have dramatically increased buybacks as a favored way to return excess cash to shareholders.
“My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends. Not now, not while a war is raging,” Biden said in October.
Biden has scolded U.S. oil producers claiming they fail to appreciate the free-market capitalism windfall made possible by American democracy nor sympathy for their retail customers. In 2022, U.S. oil company share buybacks increased 1,043%, dwarfing the 64% increase for S&P 500 while dividends were up 33%, more than three times the rise for all the companies in the index. Total free cash flow of the 23 companies in the S&P 500 Energy Index increased 2.3 times to $201 billion, with free cash for Exxon Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) increasing 150% to $60 billion and $36 billion. Meanwhile, Valero Energy Corp.’s (NYSE: VAL) free cash flow grew five-fold to $9 billion from the previous four quarters.
Other western nations have followed suit: the European Union, the UK and India have already introduced windfall taxes on oil and gas companies while others such as the Netherlands, Norway are currently considering them.
On September 30, 2022, the Council of the European Union agreed to impose a "temporary solidarity contribution" on energy companies that realize "above a 20% increase of the average yearly taxable profits since 2018”. This tax will be levied on top of whatever taxes these companies already owe in their individual countries.
And this might just be the beginning: according to a recent Wood Mackenzie report, while 2022 was the year in which the idea of the windfall tax and the villainization of Big Oil reached a new peak, this year will likely see more momentum if oil prices remain high. If prices drop, windfall taxes could be eliminated; however, Wood Mackenzie views this as “unlikely”, noting at the same time that some windfall taxes have expiration dates and clauses for modification based on oil prices.
StanChart has warned that Big Oil’s new playbook entailing maximizing the short-term share price by holding back investment and minimizing risk-taking is hardly an ideal long-term strategy. Luckily, western governments might eventually get their wish: according toWood Mackenzie’s ‘Oil and gas exploration 2022 edition, exploration well numbers in 2022 were less than half the numbers during pre-pandemic years, yet the total volume of 20 billion barrels of oil equivalent (Boe) matched the average in the 2013 – 2019 period, creating at least $S33 billion of value. Wood Mac says that oil and gas companies are getting better at exploiting low-cost, lower-carbon but high-yield assets, meaning they are in a better position to grow production and meet emissions goals while also rewarding shareholders.
