War in Iran Is Already Reshaping East Asia's Energy Future

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1:53Tracy Alloway:Radio. News.

2:04Tracy Alloway:hello and welcome to another episode of the odd lots podcast i'm joe weisenthal and i'm tracy alaway uh tracy it's april 9th uh 9 0 5 a.m there's a ceasefire ish it's sort of there's been something announced that's called a ceasefire. There does not seem to actually have been much of a cessation of fire per se. Maybe it's slowed down a little bit. Some of the headlines this morning are about Israel continuing to strike hard in Lebanon. Iran saying that, well, if there's no ceasefire in Lebanon, there's no ceasefire at all. But, you know, overall, at least as of right now, you know, the market, et cetera, we saw that huge drop in oil Tuesday night, you know, the market's still sort of buoyant, right?

2:53Tracy Alloway:Still sort of resilient. Well, I think the important thing for the purposes of this particular discussion is if you take a look at what's going on in the Strait of Hormuz, it still seems to be shut, more or less. And shout out to the Bloomberg function, ECAN, Hormuz, Go. You can see the number of ships that are going through that particular choke point. And I have two as of today, which is basically nothing. Two today. There were some headlines about how maybe even in the good case, they would let through 10 to 15, which is still sort of nothing compared to normal ship traffic. So nothing's back to normal.

3:31I was going to say, to your point, I think the thing that's confusing everyone is we keep seeing these headlines about a billion barrels lost.

4:07Tracy Alloway:Yeah, yeah. in general have happened or we see it in East Asia, whether it's like Singapore jet fuel, et cetera, or a lot of the headlines that you see about extreme rationing come from East Asia. I forget which country was. They were like, you know, they're doing that classic thing of only drive to work if your license plate ends in an odd number on this day, whatever. Very 1970s. Yeah. And we're seeing a lot of these types of headlines, some in Korea, some Thailand, etc. So it also then raises the question, you know, the Strait of Hormones is closed, maybe it'll be open, but does this change future energy trajectory in some way?

4:46Tracy Alloway:Does this mean there's going to be more comfort with coal mining over the long term? Does this mean that economies are going to try to accelerate decarbonization efforts more intensely? Could this be a huge boon for the American LNG industry where we know we're building a lot of export terminals, etc.? And if, you know, there's some sort of impairment to Qatari, LNG, then I don't know, huge questions about even just setting aside market pricing right this second or this week, the future of energy. One thing about our current market moment is we are getting like a crash course in real time about the flow of energy throughout the world.

5:25And as we will see in this conversation, like it is still very much geographically constrained east versus west. And so, as you say, the big question is whether or not the East kind of, I don't know, scrambles even harder to adapt to this.

5:40Tracy Alloway:Well, I'm very excited to say we do, in fact, have the perfect guest, someone who knows about all this stuff, someone who's been on the podcast before, but we haven't talked to him in years, which is really sad because we really like the guy. And so very excited to welcome back onto the show Alex Turnbull. He's an investor based in Singapore, but he's also a researcher with the Australian National University focused on energy security. really knows the energy scene very well, spends his time thinking about the present and future of energy. So, Alex, thank you so much for coming back on Outlaws.

6:11Thank you very much. It's great to be back on.

6:14Tracy Alloway:Yeah, really, really appreciate it. Talk about like right now, you know, this phenomenon that we talk about where prices are up, but, you know, by some measures still within some sort of historical range, whereas the headlines that you see about rationing, etc. like this is extremely dire etc. Give us your lay of the land from the account from the from the Asian perspective from the perspective of East Asian countries like how dire are things just like right now without that without that flow terrible frankly the challenge right now for Asia is that most of their crude supply does come from the Middle East or there are some countries which do have some domestic production um malaysia china of course but broadly speaking asia is a massive crude important principally from the middle east because it's the most proximate supply and generally it's the cheapest shipping distances and costs so asia is very heavily exposed right now and more acutely thinking about what the impacts might be how they might want to pre-answer than the united states of course which produces a lot of oil but would still need Middle Eastern grades for blending and refining.

7:28Also Europe, which has access to quite readily. How much do the spot prices actually matter at this moment in time? Because, you know, you can look up something like Dubai, Oman, or some type of oil that you would assume would be maybe flowing into East Asia, and you can look at the spot price. But like if it's not actually moving, does that like moving out of the Strait of Hormuz into Asia, does that mean anything? It does certainly for some grades. So for Imani, crude can still be loaded and is being loaded. Those are real prices. Prompt Brent, those sorts of trades are real. So you're often seeing, even for loadings from Yanbu and Saudi Arabia, OSPs, which are indications of price, are anywhere from$20 to$25 above whatever the prevailing Brent contract is.

8:21Tracy Alloway:So in terms of like the knock on effects on the economy, mentioned some of the rationing thing. OK, yes, this is very they're highly exposed to it. What is it? Is it hitting now? Is it is the economic destruction already taking place? Like talk to us about like just sort of like, I guess, on the ground figuratively and literally, what are some of the ripple effects that we're seeing? You're certainly seeing serious constraints on consumption where they don't really have a lot of refining capacity and where there is they just don't have large amounts of crude storage. So places like the Philippines and Vietnam are already under some significant stress.

9:03A lot of it is also driven by the fact is this kind of a question of whether you can get credit lines to be able to pay these prices. and ultimately the decision of the refineries is if they don't have inputs they have to shut the refinery down which incurs a large amount of fixed costs and downtime and so forth so a lot of these players are kind of living hand to mouth and trying to get whatever they can to stay open as long as they can so that's how you have this extreme willingness to pay for prompt cargos in order to keep these assets operating and running but then you know the futures curve is out 30, 60 days.

9:40And that's a long time in the current febrile context where you could get resolution or not. And so that disconnect is going to remain, I think, so long as there is no sense of a clear path here.

9:55Tracy Alloway:Who's not getting energy? Because, all right, if there are some entities that are almost going to be completely price insensitive, they have to keep the lights on, And they're going to just pay whatever. And so you get these huge short-term spot prices. But volume is volume. And so who is actually being forced to turn off the lights or not run a refinery or whatever because they're getting outbid? If there are fewer molecules, there are fewer molecules. Yeah, I mean certainly less high-income countries in Asia. You'll start to see quite an acute crunch in the Philippines. So they've recently secured some cargoes from China on a one-off basis.

10:34Some in Vietnam are the same. You know, places like the Pacific Islands don't get there in a not very good place. So it's already starting to begin the demand destruction starting mostly by income. So you mentioned refineries there. And one of the headlines that's come up recently is Asian refining margins slip into negative territory, which would seem like a bad thing if you're a refiner. And I take the point that you need to keep these assets going because it's hard to shut them down and then restart them again. But if you're not making any money, how long are these refiners actually going to keep going for?

11:15Well, for some Chinese teapot refineries, just smaller private ones, they live in a different political slash economic context. And if they are told to stay on, they will. You know, it depends on which. In many of these countries, you don't have purely market price fuels. So whether that's Vietnam or China, places where you have market pricing pass through, like Australia, the price of fuel is getting very expensive indeed.

11:44Tracy Alloway:So in those situations basically where – Tracy mentioned a refiner might be actually operating at negative margin. That's an environment in which the retail price of fuel is not liberalized. There's a – the government sets the price of fuel or sets them banned or something like that and the refiners just have to keep operating until the next time that band is changed. Yes. OK. Got it. So what are you seeing – let's talk about right now. Is this, is there, what's happening with US LNG? Is it all being taken up by Europe? Is Asia trying to get in on the action or bidding for cargoes? Like what's happening with American flows?

12:26American flows are going to move into Asia quite sharply right now. So Asian prices and spot, even the JKM futures above European TTF or title transfer facility futures for the next period, that could change quickly. But at the moment, Asia has a much higher urgency and willingness to pay as they go into summer, higher power demand from cooling, air conditioning, and also just a much more acute dependence upon LNG in certain countries. So in Europe, you've also said you're going into summer, you have this solar and wind and it's not quite panic stations just yet. so I think Europe will be a little bit more slow to fill its storage but then by if this goes on till say June or July then that's when the real panic will set in

13:32Hey, Fidelity. What's it cost to invest with the Fidelity app? Start with as little as$1 with no account fees or trade commissions on U.S. stocks and ETFs. Hmm. That's music to my ears. I can only talk. Investing involved risk, including risk of loss. Zero account fees apply to retail brokerage accounts only. Sell order assessment fee not included. A limited number of ETFs are subject to a transaction-based service fee of$100. See full list at fidelity.com slash commissions. Fidelity Brokerage Services, LLC. Member NYSE SIPC.

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15:20Tracy Alloway:They don't sell insurance. They deliver transparency. Before you trust your policy to protect you, let My Policy Advocate tell you what it really says. Go to MyPolicyAdvocate.com. For Asia, how much of a role does Russian oil play right now in terms of replacing lost Middle Eastern supply? I mean, most of the Russian crude has already been sold anyway, and it has been sold very heavily into Chinese refineries and teapots. So it's not like some of it was sitting offshore when it was going through a period of more robust US sanctions. The offshore barrels of oil and water has been dropping very sharply as all that crude has been absorbed into various places, India, China, like I said.

16:02So, yeah. So I think I think that sort of that that has provided something of a buffer to this shock because there was this backup of Russian crew that couldn't. No one was quite sure whether they could pay for it without being sanctioned by the US. But, of course, that's melted away in the current context.

16:21Tracy Alloway:You mentioned that the Philippines has imported some gas from China. And I'm curious, like, what has China, we know they've been a big accumulator over the years generally of natural resources and they have strategic stockpiles and so forth. But right now, what are they doing and are they trying to play some role in stabilizing or easing the crunch for the region overall? I think they've been very strategic. Certainly, there's more or less control on exports of oil products right now, which is not very helpful for the region. because they have over time been large exporters, they are clearly doing this in a very targeted fashion, and I would assume there's other considerations behind that.

17:09Oh, wait, say more. Well, for example, China has territorial disputes with the Philippines and Vietnam and the South China Sea, and they've now got something involved.

17:20Tracy Alloway:Interesting. Okay, that makes sense. Yeah. Oil as geopolitical tool is a tale as old as. As all the time. I was going to say time, but I guess as old as what, 200 years or something like that. OK, so we were talking about the potential for an energy crisis to actually hasten decarbonization efforts in Asia. And this is something that came up before on an episode we did on China's teapot refineries. Are you seeing rumblings of that at the moment or are people still in sort of wait and see mode? No, there's definitely been a notable pickup in certain areas where there was already a bit of momentum.

17:58So in Japan, they have been undertaking a number of nuclear restarts. They were moving very tentatively as the public got behind nuclear and the politics became less challenging. That is all apparently accelerating now. So Japan will push very hard on nuclear restarts. And more importantly, the public polling is really strong for it. So there's not a lot of political risk. And of course, Takechi had a massive election win. So she's in favor of it. The public's behind it. And there's a matter of necessity now. So I think that's something one could assume is only going to move faster. And then in Korea, there's also more of a push for nuclear restarts.

18:40So that's moving quickly. China is doing some very pointed stuff to try to reduce LNG burns and use in chemicals. It's tricky if you've got a plastics plant that's kind of hard to do, but they're having a red hot go at it. And similarly, you're also starting to see a staggering acceleration in EV adoption. If you do calls to auto dealers around Asia and ask them how much time electric vehicles stay on the lots down to single days, and many of them are back audited now so uh if that probably wasn't even you're doing are you calling up the car lots and asking

19:19Tracy Alloway:them this yeah of course wait say more about this and what would they have said this is actually this is a this is not this is new uh this is new it's on the ground information but talk about this like what would they have said a month ago what are the type of uh dealers you're talking to what they have said a month ago and what are they saying now i mean you know january uh when there There was, you would see BYD cars, for example, a couple of dealers in Australia, Singapore, other parts of Asia, they would be on the lot for 25 plus days. You know, the inventory turns were kind of a bit slow and the market did look kind of glutted.

19:58We're down to single digit days in most places now. So anything China can produce out of the EV sector, I think will get sold this year. That's just really the constraint is on the supply side, not on the demand side now.

20:12Tracy Alloway:I don't know the degree of granularity that you pay attention to American politics. Are you familiar with – do you know who Thomas Massey is? Does this name ring a bell? Yeah, yeah. He's a Kentucky – a congressman from Kentucky who drives a Tesla with a bumper sticker that said this Tesla is powered by Kentucky coal. So he's like – he's a politician from Kentucky, Republicans. He's very pro-coal, but he's also pro-Tesla. So he has his coal-powered Tesla. Is that basically the sort of near or medium term future of Asia, which is like, OK, LNG is impaired. BYDs are flying off the lot. And so essentially we have a lot of like de facto coal powered Teslas driving around or sorry, coal powered BYDs flying around.

20:57To a certain extent, yeah. I mean, there's also very hard analytic math behind this in the sense that there are, the Straits of Hormuz do not, aside from the east-west pipeline, which looks like it got pretty badly hit today over the last 24, 48 hours, there is no way for that oil to make its way out otherwise. So this is very different to 2022 where you have sanctions, you have this and that, but the spice will flow if it can physically move or be moved by pipelines, by rail or what have you. And so in 2022, I was pretty sanguine about the impacts on the oil market because Russia's got a lot of pipeline capacity to China, through Kazakhstan, and there was clearly not really the appetite to do full -on shadow fleet sanctions that would be required to slow down.

21:48In this case, you actually just can't get it out. That's all there is to it. And so if you look at that vulnerability with oil, where 20 plus percent of the market comes from the Middle East, and LNG, which is about the same numbers, and then you look at, say, a big network flow graph model of global coal market, which I've done, the coal is not really dependent upon choke points. The biggest producers are places like, you know, first of all, China produces an enormous amount domestically. It's the world's largest producer. India does too. Australia, South Africa, these are all places with access to open ocean, no quirky straits.

22:26And so you don't really have to worry too much about whether some geopolitical event takes out coal. The most reliable option, of course, is just producing stuff in country, whether that's solar, wind, you know, batteries, nuclear. But in a pinch and currently, I think coal is going to have a bit of a comeback for that reason a lot. Yeah. Sending coal aside for a second, when you look at alternate sources of energy, do you have like, I don't want to say a personal favorite, but which one of them do you think comes out on top in the sort of medium to longer term from this particular situation? It's like asking someone, well, you know, what wine should I grow?

23:08What should I plant? I'm like, well, okay, where are you? So if you're anywhere close to the equator or have a good solar resource, solar is crazy cheap. And if you've got it year-round, batteries are also pretty cheap. That's hard to beat. If you're somewhere in the Baltic or something, then it's weak, right? So I think the appeal with solar, which is that you can roll it up very quickly, particularly with households. and it's interesting you're already starting to see the impacts of australia's government pushing um residential batteries and that is that the intraday spreads in power in australia are very subdued and the gas five generators are not really pricing the market anywhere near as often as they used to and gas burns have actually collapsed as they have in california so if you want to kind of decouple from gas prices, batteries plus storage, solar plus storage is a very quick fix and can be rolled out very quickly.