Recovery Game
China’s oil demand will rise significantly next year, after barely suffering a scratch in 2020. Despite the pandemic, oil demand in China—which did not fall in 2020 but was roughly flat—begins 2021 from the same elevated base recorded in 2019. The IEA then expects China to tack on a full 0.8 mbpd of new demand. By doing so, China is expected to account for about 14% of next year’s big bounce, as the world recovers. Indeed, China and India together will drive Non-OECD demand growth, according to this month’s IEA Oil Market Report. For comparison, while OECD oil demand is also expected to rebound strongly, the developed world only makes it half way back to the previous 2019 highs. The portrait is a familiar one: OECD oil demand growth failing to sustainably advance (or decline) while Non-OECD growth presses onward.
And there is upside risk to the global growth forecast. Vaccine development is moving at a far more accelerated pace than most anticipated, or even hoped. The US is about to lead a sea-change in policy, which will further impact world trade. Overall, if you combine the twin brakes applied by tariffs in 2019 with the pandemic in 2020, there is enormous potential for a broad based macroeconomic advance, one that is led by industrialism. A slingshot, if you will. Therefore, despite all the ongoing constraints to demand growth, oil is going to nevertheless bounce hard next year.
But we must always pay heed to changes vs. levels. Conveniently, the 2019 global oil demand peak has now settled at a near perfect 100.1 mbpd, according to IEA Paris, making for easy calculations going forward, on both an absolute and percentage basis. While EIA Washington is using 101.52 mbpd, and OPEC 99.76 mbpd, if we make up a chart that uses the IEA forecast as our preferred source, our three year series looks like this:
According to IEA, global oil consumption will be back at 97% of 2019’s level by next year. The bounce has both fundamental and statistical drivers. Clearly, the global economy will attempt to take off next year. But we are also coming up from the deep base of 2020, when demand nearly fell by a whopping 7 mpbd.
It’s not clear, however, how much further this will drive oil prices. The system is carrying massive spare capacity, probably enough to easily hit 101-102 mbpd. While a general price increase would of course be necessary to restart supply to levels above 100 mbpd, the recent price advance to $40 (WTIC) may have moved a good portion of the way already, to supply next year’s expected demand level. The oil market served up 100 mbpd of supply in 2019 at an average annual price of $57 per barrel (WTIC). Just speculating, but after a slow start to 2021, perhaps a WTIC oil price of $45-$50 will be adequate to meet next year’s demand.
The Biden-Harris ticket decisively won the Presidency, but not the Senate, in this month’s US elections. Because most expected a dramatic victory from top to bottom, and because the Republican Party has mostly gone along with Trump’s unwillingness to verbally concede the race, this has taken some exuberance out of the election’s aftermath. While the votes have not all been counted, there is additionally a very sobering result from the House of Representatives, where virtually no one expected the GOP to gain seats. As of this weekend, Republicans have flipped 10 seats to the Democrat’s 3 for a net gain (so far) of 7 seats. While the math already dictates Democrats and leader Pelosi will maintain control, the shift has made for an uncomfortably thin margin. 14 seats remain undecided (due to ongoing ballot counting) and the demarcation in the House currently stands at 218 Democratic seats to 203 Republican. 218 seats is the minimum threshold for control. You can track the remaining progress at The New York Times …
… The structural disadvantage for Democrats in the Electoral College is stark, and on full display in this year’s election. Consider this fact: Biden just won 306 electoral votes, matching Trump’s electoral vote totals exactly, from the 2016 election. But this required the Biden-Harris ticket to gather at least 5 million more national votes (and likely more, once all tabulation is completed). Trump in 2016 was able to achieve 306 electoral votes while garnering nearly 3 million votes less than Hillary Clinton. Another view: Democrats have won the popular vote in 7 out of the last 8 elections.
If you are outside the US, and trying to understand why the country doesn’t have universal health care, is limited in its ability to properly invest in much needed infrastructure, and keeps returning to the tax-cut and monetary policy solution-set, this structural asymmetry is largely the reason. The Electoral College of course derives its math from the structure of the Senate in which, for example, the country’s most populous state, California, and its least populous state, Wyoming, are represented by the same number of senators: 2. The representation in the House meanwhile is designed to (partly) offset this structure, and thereby California has 53 congressional seats and Wyoming has just 1. Adding those seats to the senate totals gives California 55 electoral votes and Wyoming 3. But there are alot of states—red states in particular—like Wyoming. And that’s how a Republican presidential candidate can more easily cobble together a win in the Electoral College, with little care for the popular vote. A look at this year’s map:
The disadvantage extends more chronically, however, to the job of actual governance. The House is the House. And the Senate is the Senate. And for years now, Mitch McConnell has enjoyed iron-clad control of the Senate. Could that be about to change? Well, as it happens, the impact of this year’s election is not over, and there is a major Round II coming this January when both Senate seats in the State of Georgia will see a special runoff election on Tuesday, January 5, 2021. Democrats have to win both to wrest control away from Mitch McConnell, and if they do, that will be the difference between a Biden Administration limited to executive powers to change climate and health care policy, or, having both legislative bodies at its command.
Using executive powers, there is much a Biden Administration can do to pursue climate goals and make energy transition go faster. Levers are available to pull at the Environmental Protection Agency, the Departments of the Interior, Commerce, Transportation, and of course, Energy. But without the Senate, the Biden presidency will be highly constrained from spending any money on necessary infrastructure. Needless to say, there will be no Green New Deal unless by some miracle a strong faction developed within the Republican caucus in the Senate to undertake such an initiative. On that question alone, one of the Senate’s most independent moderates, Mitt Romney of Utah, recently said in a televised interview where he was discussing the election loss of Trump and the imminent Biden administration, “I want to make sure that we conservatives keep on fighting to make sure we don't have a Green New Deal, we don't get rid of gas and coal and oil, that we don't have a Medicare For All plan.”
Some are more optimistic. Robert Hockett, a professor of Law and Public Policy at Cornell University, has recently laid out a far more expansive slate of powers he believes are available to the executive branch. In a long piece published in Forbes early last week, The InvestAmerica Plan - Reconstruction With Or Without Senate Help, Hockett suggests historical capacity in the Federal Reserve system could be revived to allow regional support directly through local banks to monetize commercial paper issued by small business. Hockett further believes the Treasury Department could be leveraged to modernize and deploy digital wallets to all taxpayers, and he sees the potential for a national development bank to be established inside of Treasury. While these and other power moves which Hockett foresees may be seen by some in the electorate as overreach, it is equally possible that an intractable Senate, under the vice-grip of Mitch McConnell, may also make way for them politically. This would be true especially if the Republican Senate is seen as not merely obstructionist, but goes so far as to even interfere with Biden’s choices for his cabinet. One more reason why the special election in Georgia on January 5, 2021 to pick two Senate seats is shaping up to be a kind of mini-election, with national implications.
Speaking of Georgia, the Biden-Harris ticket flipped the state for the first time since 1992, along with the state of Arizona. The victory is far more meaningful than the 1992 result however, because Bill Clinton was only able to take Georgia through the votes lost by George H. W. Bush to a third party candidate, Ross Perot. Four years later, Bill Clinton struck again with a similar victory in Arizona, also because of Ross Perot. This time, the Biden-Harris ticket won both states outright. It would be reasonable, therefore, to think the double Senate election this January may swing just enough to seat one, if not both, of the Democrats.
The US Dollar could weaken significantly if global markets put 2020 behind them, and begin to price in a reduction in risk, and a resumption of world trade. Historically, crises are associated with a tightening market for US Dollars as participants outside the US are forced to deleverage. Typically, this can result in a rush to cover (pay back partially, or entirely) US Dollar based loans and credit, which immediately places upward pressure on the greenback. Indeed, the US Dollar started the year with a moderate strengthening trend, then spiked very hard during the initial phase of the pandemic. Since that time, the greenback has fallen, and is now down nearly 4% since the start of the year. And with vaccine development now moving along quickly, and a sea-change in tone and policy coming to Washington, the US Dollar has been fading anew. When you look at the weekly chart of the USD Index, below, it does seem likely that the index is poised to fall below 92.00. If so, the signal is ridiculously easy to interpret: a sign that reflationary policy is credible, and that the dollar will continue moving within the relaxed posture it takes during times of global growth.
The end of Moore’s Law may finally be on the horizon, but energy efficiency in microchip performance may have more gains to realize. The tech community has been musing for some years now about the end, or really, the slowdown in Moore’s Law. In an early 2020 article at MIT Technology Review, We’re not prepared for the end of Moore’s Law, much of the expert opinion seems to be concentrated today on how to make existing chips more efficient by optimizing software, and chip architecture.
But the release of the M1 chip from Apple opens up a sightly different but related avenue, one of energy efficiency. The battery life of the new MacBook Pro comes in at an astonishing 18-20 hours. Apple’s general claim about the M1 is both straightforward, but frankly impressive: that the new chip will offer the same peak performance of today’s average CPU, but with just 25% of the power demand.
Perhaps it matters less than we assume that Moore’s Law and other such doublings are slowing down, or will no longer be achievable. If there are gains to be made on the efficiency side, those are important too. Especially if it means we can achieve the same computing power for less electrical power.
China’s solar manufacturers are sounding the alarm on rising glass prices. But the input inflation and tight supply appear to be entirely about a government policy decision made in 2018. At that time, the glass industry was facing over-capacity and was also coming under greater scrutiny for its pollution. According to a Bloomberg report, the government then ordered the industry to not add new capacity and, well, here we are.
The development is a warning, however, that production growth of wind, solar, batteries, EV, and powergrid systems may move so quickly this decade that shortages of all kinds—some quite real, some through policy error—will no doubt appear. Readers may recall that a massive shortage of sand began to affect the US oil industry a few years ago, because the growth of tight-oil production was so frenetic. See, for example, this 2017 piece in The New Yorker, The World is Running out of Sand.
More generally, there is a newly fashionable criticism of renewable energy that it’s “not renewable at all” because it calls, and will call, upon natural resources. This reflects a common misunderstanding: renewable energy never makes the claim it wont call upon copper, sand, glass, lithium, silver, or steel. Rather, renewable energy makes a different and far more compelling offer: that it will call far less on natural resources than fossil fuels. And best of all, that once deployed, its call on resources drops massively over the course of its lifespan.
On Thursday, November 19th at 2:45PM Pacific I will be moderating a panel on new mobility, at the CoMotion LA conference. You can learn more about the three day conference by hitting the card, below.
The Gregor Letter base case for economic recovery maintains its more positive view for recovery and growth in 2021. That said, we are all now playing a kind of recovery game, in which important factors which both constrain and promote future growth are now running on separate tracks. Mostly, I think there’s a strong case to be made that the collection of growth friendly trends—interest rates, stimulus, better policy, better governance, renewable affordability, pent-up demand, monetary policy, and vaccine progress will add up to something greater than the pandemic itself. In the near term there is no question however that the pandemic will be dominant at least through January. Indeed, one commentator suggested the current wave will peak when average northern hemisphere temperatures bottom. That sounds about right.
China’s economy is continuing to revive, and might even be characterized now as a strong recovery. This bodes well for the Non-OECD as a whole. Here in the West there is also justifiable optimism for the US, something which could not be said in recent years. The region that may emerge, therefore, as one for greater concern is Europe. The pandemic has of course roared back to life on the continent (and in the UK too) but it’s still not clear that the ECB has a plan. The EU returned to deflation in August, and there are growing concerns the region-wide economy could double-dip.
Ironically, it may be the US return to the Paris Agreement that helps Europe make a decision. If President Biden is facing an obstructionist Senate, with only executive powers at his disposal, this could act as a catalyst for Europe to go bigger on green stimulus, especially if the Biden administration suggests that would help his cause. We must remember now that the renewable and energy infrastructure market is fully global. Growth of new energy technology anywhere is beneficial to the cause everywhere. Europe needs the US market for powergrid technology to grow, and both regions want to see the learning curve maintain its speed. An economic recovery, led by green energy, is clearly on the minds of both Europe and the US. By recognizing the common interest, Washington and Brussels could move forward together.
—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us
Photos: 1. Shanghai, 2008, by Wang Tong.
The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.
