Why the energy crisis won’t save western oil refineries

0:02Good morning from the Financial Times. Today is Friday, August 21st and this is your FT News Briefing. Bond investors were not reassured by the U.S. Treasury. And Shanghai's tech stock index is going gangbusters. Plus, the boost in oil demand could backfire on Western refineries. So what's going on at the moment is a short-term profit, but a long-term potential hit. I'm Sonia Hudson, in for Mark Filipino, and here's the news you need to start your day.

0:43A band-aid on a bullet hole. That's what one investor called U.S. Treasury Secretary Scott Besson's attempt to calm the bond market. Bonds have been selling off all week around the globe. Besson's department announced on Wednesday that it would at least double purchases of long-term government debt. U.S. government bonds rallied right after the announcement, but yesterday the sell-off stormed back. What could actually fix things? Here to tell us is the FT's George Steer. Hey, George. Hello. So before we get into alternate solutions, why didn't Besant's bond buyback plan soothe investors? I think investors are of the opinion that even though Besant has announced much bigger purchases of long-term U.S.

1:32government debt, that those measures on their own will not be enough to kind of prevent yields in the U.S. rising as they have been for the last few months. I think most investors hope that he'll do more. Whether he kind of bows to that pressure, we'll see. Yeah, I want to get into that in a minute. But first, what do investors say would be enough to turn things around? Lesson doesn't have that much power to do much about this, it turns out, because the forces driving US long-term borrowing costs higher are basically out of its control. We've got worries about inflation. There are concerns about the US government debt, which on Wednesday hit$40 trillion.

2:16Rates are rising or expected to rise in Japan. The yen is weakening. All of these kind of factors mean that Besant on his own doesn't have that many kind of strings to pull to bring long-term borrowing costs down. You mentioned earlier that investors are going to try to push him to do more, even if it wouldn't totally fix things. What do they want to see from Besant? I think there's a concern among investors that now that Besant has signaled his concern about rising yields and promised to double the amount of long-term treasuries that his department will buy, investors will want more. They'll want the buybacks to be even higher.

2:56On Thursday, Besant said exactly that, that the doubling of the buybacks could be even more. So I think there's a worry that the market might get exactly what it wants, which is just more U.S. government intervention in markets full stop. What's the worry there? The idea is that markets should be left alone, right? That, you know, the market is the best measure of where prices should be. That's the kind of concern around government and treasury departments around the world interfering. What have we heard from Besant about all this? What has he had to say? Well, on Thursday, he kind of came out swinging and said that the buybacks announced on Wednesday could be even bigger than initially announced.

3:37I would note that it could be more than the$4 billion per issue. And he also registered his kind of a displeasure with the gradual rise in U.S. yields. Part of it is signaling here and to show that we believe that the yields don't reflect the underlying fundamentals. Which was a kind of oblique dig at investors selling U.S. government debt. Well, that really brings me to my last question, which is this concept that we've talked about on the show before of bond vigilantes. Basically, investors selling off bonds to try to get the government to do what they want. Do you think we're seeing that kind of dynamic right now?

4:20Well, U.S. government debt has been selling off for a while now. So I don't know if this week's moves have proved that vigilantes are back en masse. But the bond market has certainly been signaling for a while now that lots of investors are worried about U.S. debt, inflation. The amount of bonds that are being issued right now by some of the big AI companies too, And vigilantes, if you want to call them that, could be expected to have more of an impact going forward if Besson tries again to keep a lid on yields. George Steer is a U.S. markets correspondent for the FT. Thanks, George. Thanks.

5:04Shanghai's Star 50 index is benefiting from an investor frenzy for domestic tech stocks. The index is China's answer to the NASDAQ, and it's up 23 % this year. That's well above gains on the Shenzhen and Hang Seng tech indices. Blockbuster listings in Shanghai are helping boost the star 50. Top companies, including CXMT and Unitree, went public within the past month. They haven't yet been included in the index, which means the star 50's gains are likely to continue. The rise in companies choosing to list domestically comes as Beijing worries about capital leaving the country. It also wants to keep its prized tech groups under its control.

5:54Western oil refineries are going to continue to close over the next decade, even though the Iran war energy shock has meant they're running close to capacity. Plus, these companies are earning massive profits. I'm joined now by the FT's energy editor, Malcolm Moore, to talk about this. Hi, Malcolm. Hi there. So what has the Iran war energy crisis done to these refineries? So if you are a refinery, an oil refinery, taking crude oil and turning it into gasoline or diesel or jet fuel, you have had an astonishing year. Obviously, in the Middle East, what's going on with Iran has cut off a huge stream of refined fuels from the global market.

6:40And also, at the same time, Ukraine has been blowing up Russian refineries. So that is also off the market. And as a result, everybody else, particularly in the US and in Europe, they're all running as close to maximum capacity as they can and making lots of money, as you say, because we really need the fuel. Well, why isn't that enough to stem the tide of refinery closures? What people said to me was, great year, but in the long term, the trend is still there. And the trend is that eventually, everybody in Europe and North America and elsewhere, we all buy more electric vehicles. And the more electric vehicles we buy, the less road fuel we need.

7:29And the less road capacity we need. So basically, if you fast forward sort of 10 years from now, you know, Europe will be processing around 20 % less crude into fuel than it is now. And the US will be processing around 7 % less crude into fuel than it is now. The other consequence of the Iran conflict is that fuel prices are going up everywhere, right? And so even more consumers are thinking about switching to electric vehicles. So what's going on at the moment is a short-term profit, but a long-term potential hit. I'm also curious, how does this compare to refineries in other parts of the world?

8:09Well, so it's not just that we're switching to electric vehicles. It's also that other places are building newer and shinier and more efficient refineries. So, for example, the Dangoti refinery in Nigeria. You've also got these mega hubs in China and in the Middle East. And so basically, what we're seeing in North America and in Europe is that the domestic market shrinks because of electric vehicles. And then you can't sell the fuel export because you're outcompeted by these cheaper refineries elsewhere. So it seems likely then that we're going to see this decrease in refineries in the West, but an increase in other parts of the world.

8:55Exactly. And the issue with that is that governments get a little bit anxious when they can't absolutely secure their fuel supplies. And don't forget that these refineries, they turn out fuel for our cars and our trucks, but they also make the fuel for our fighter jets and our tanks, right? So there are lots of other strategic questions that need to be answered. Malcolm, what does all this tell you about the future of the oil industry at large? I think this is a reminder that even at times when oil companies are making a lot of money, which they are making a lot of money, you know, when prices get too high, actually, that's probably going to have an effect on the energy transition and the speed at which it unfolds.

9:38So it's always this balance, right? You know, and it swings back and forth as to how quickly the transition goes. But high prices doesn't always mean long term good health for the oil industry. Malcolm Moore is the FT's energy editor. Thanks, Malcolm. Thank you.

9:59Another chapter has closed in the fallout from the collapsed Chinese property giant Evergrande. Its founder, Hui Kian, was sentenced to life in prison on Thursday. The court said that between 2016 and 2021, he falsified company documents, fraudulently issued securities, committed fundraising fraud, embezzlement, and there was a litany of charges, really. That's the FT's Asia financial correspondent, Arjun Neil Allum. Evergrande was, at one point, the world's most indebted property developer with over$300 billion in liabilities. and Hui Ka Yan was one of the richest men in Asia. So it's quite a spectacular downfall for him.

10:45Arjun says Evergrande played a big part in the property bubble bursting in China and that the story is far from over. What happens next is that there is an offshore liquidation process of the listed Hong Kong company of Evergrande. There will be other cases to come now. So the Evergrande estate in Hong Kong is suing PWC, the accounting firm, for audit negligence and claiming damages of about$8 billion. This is an ongoing process and we'll be seeing more and more cases in the future. That's the FT's Asia Financial correspondent, Arjun Neil Allum. You can read more on all these stories for free when you click the links in our show notes.

11:31This has been your daily FT News briefing. Check back next week for the latest business news. The FT News Briefing is produced by Safia Efmed, Victoria Craig, and me, Sonia Hudson. Our show is mixed by Alex Higgins and Sam Giovinco. We get help from Peter Barber, Michael Lello, David DaSilva, and Gavin Coleman. Our executive producer is Topher Forges. Flo Phillips is the FT's global head of audio. And our theme song is by Metaphor Music.

12:04Thank you.