Apr 23, 2019

Axios Generate

By Ben Geman
Ben GemanAmy Harder

Good morning!

Yesterday marked the 1985 release of Prince's "Around the World in a Day," so it provides today's infectious intro track...

1 big thing: Trump gambles on Iran as 2020 looms

Passenger boat with Iranian flag overlooks oil tanker in the Strait of Hormuz. Photo: Kaveh Kazemi/Getty Images

The White House is trying to thread a needle: Tighten oil sanctions against Iran without raising energy prices enough to erode the president's political standing.

Driving the news: ICYMI, the administration isn't renewing sanctions waivers beyond early May for countries that still buy Iranian oil.

The big picture: "It's a gamble on the part of the administration," oil analyst Ellen Wald tells Axios.

  • "The administration is hoping that either other producers will make up for it, or at least gas prices will fall again before it becomes a political liability," she says.

The intrigue: It might very well work, and the roughly $2 jump in oil prices since the news broke Sunday night — Brent crude is trading around $74.16 this morning — may signal surprise as much as anything else.

  • Analysts see a more volatile oil market, with a smaller cushion to absorb geopolitical conflict other factors that can hinder offsetting supplies. Risks include Iranian actions in the Strait of Hormuz and conflict in Libya.

What's next: Analysts say there's enough crude sloshing around to prevent markets from going bananas, but do see a greater chance prices will skew higher.

  • Goldman analysts, in a note, are sticking to their forecast of Brent trading in the $70–$75 range this quarter, but add there's likely to be a delay in what they see as a decline to the $65 range later this year.
  • Barclays analysts now see "material upside risk" to their forecast that Brent will average $70 this year, noting that the decision will indeed tighten markets, but the action "does not affect our view on longer-term prices materially."
  • Eurasia Group, via a note, predicts near-term volatility, but not a big or sustained price spike, pointing to the market's spare capacity levels and the likelihood that China and India will continue some Iranian imports.

Threat level: The administration is expressing confidence that Saudi Arabia and the United Arab Emirates, among others, will boost output to offset Iranian barrels. But there's some peril there.

  • "I think they may find that there's a difference between what the administration heard from Saudi Arabia and what Saudi Arabia believes it actually committed to doing," Wald notes.
  • Plus, Saudi barrels are not a panacea.
  • "The big gamble both the president and his Gulf allies are taking is that high geopolitical disruption risks amidst low spare production capacity could cause oil prices to rise sharply despite offsetting supply increases," Rapidan Energy Group's Bob McNally tells me.

The bottom line: There's still lots of time before the heart of election season.

  • "There may be pain for U.S. consumers, but it will only be for the short term and it’ll be over well before the 2020 elections," Eurasia Group's Henry Rome tells Axios.
  • "There will be quite a bit of volatility in the near term, but this will come out in the wash over the next year and a half," he adds.
2. Go deeper: The Iran decision

Illustration: Aïda Amer/Axios

Here are a few more notes on the Trump administration's decision not to extend waivers for buyers of Iranian oil ...

Behind the scenes: "The announcement shows the significant political strength of John Bolton, the national security adviser, who decisively overruled the State Department," Eurasia Group analysts said in a note.

What they're saying: Here's a little more from my exchange with Rapidan's McNally:

  • "President Trump is more willing to risk higher oil prices this year by zeroing out Iran's oil exports than he was last year because Iran's exports are lower (1.3 mb/d now versus 2.5 mb/d last May) and Saudi (and another producers') spare capacity his higher this year than last (2.3 mb/d versus 1.9 mb/d, respectively)."
  • "Also, Trump secured a promise from Saudi and UAE leadership to more than offset any lost Iranian barrels. But with regular gasoline averaging $2.83 nationwide and rising twice as fast as normal on the run up to Memorial Day, pump prices don't have much more headroom before drivers register their displeasure if the President's bet fails."

Context: Axios' Dion Rabouin writes ... This year's rally feels eerily similar to last year when oil prices spiked above $85 a barrel in October, only to crater near $50 in December. Traders were caught on the wrong side of the unwind, with bets that prices would rise outnumbering contracts betting it would fall by 9 to 1.

The latest: "Beijing on Tuesday again lashed out at a U.S. decision to impose sanctions on countries that buy Iranian oil, calling it a violation of China's interests that will intensify turmoil in the Middle East and international energy markets," ABC News reports.

3. How California can meet its energy goals
Expand chart
Data: Energy Futures Initiative; Chart: Chris Canipe/Axios

Axios' Amy Harder reports ... Energy efficiency and getting off oil-fueled cars are two of the most effective ways California could meet its ambitious new clean energy law, according to a new report.

The big picture: California has America’s most aggressive climate change policies, including a recently passed mandate for 100% carbon-free electricity by 2045, and an executive order calling for 80% reduction in emissions across its entire economy by 2050.

Driving the news: The new report is led by President Obama's former Energy Secretary Ernest Moniz, who now runs a think tank called the Energy Futures Initiative. Its conclusions find that the more technological options California allows to meet its goals, the better.

The big picture: California has America’s most aggressive climate change policies, including a recently passed mandate for 100% carbon-free electricity by 2045, and an executive order calling for 80% reduction in emissions across its entire economy by 2050.

Driving the news: The new report is led by President Obama's former Energy Secretary Ernest Moniz, who now runs a think tank called the Energy Futures Initiative. Its conclusions find that the more technological options California allows to meet its goals, the better.

Go deeper:

4. Why EVs are a big opportunity for utilities

A new Boston Consulting Group paper is the latest analysis to conclude that EVs present a suite of revenue opportunities for U.S. power companies that play their cards right.

The big picture: The consultancy estimates that the rise of EVs could "create $3 billion to $10 billion of new value for the average utility" that has 2–3 million customers.

By the numbers: They see EVs (plug-in hybrids and pure battery vehicles) accounting for up to 30% of U.S. light-duty vehicle sales by 2030 and up to 12% of vehicles on the road.

What's next: The report sees several primary business opportunities as more people use electricity to travel.

  • "Utilities will earn a return on capital investments in the new grid infrastructure that is required to meet the increased demand from EVs," they note.
  • The report also concludes that there's a major business opportunity for power companies that offer EV-related products and services
  • "They include EV operations and maintenance; the installation, operation, maintenance, and servicing of EV charging points; software solutions for such things as energy management and fleet routing; and consulting services," it states.

Flashback: The report comes on the heels of an Accenture analysis which concluded that sees EVs creating a potential $2 trillion-plus market for utilities in the U.S. and Europe over the next couple decades.

5. On my screen: Tesla, Exxon, climate change

Electric vehicles: Tesla plans to introduce self-driving taxis in some U.S. cities next year, CEO Elon Musk announced on Monday at a company event for investors, during which it also unveiled a new chip to power its autonomous driving system, Axios' Kia Kokalitcheva reports.

  • The big picture: Tesla has long proclaimed its ambition to operate fleets of self-driving taxis. But limitations of the company's currently available autonomous driving tech — along with well-publicized accidents involving the limited self-driving technology its cars currently offer — raise questions about Tesla's aggressive timeline.

Natural gas: Via Reuters, "Exxon Mobil Corp said it has signed a 20-year agreement to supply liquefied natural gas (LNG) to China’s Zhejiang Energy, as the U.S. oil and gas giant steps up marketing of the fuel in China, the world’s second-largest buyer."

Climate change: "More than 1,000 people have been arrested at Extinction Rebellion climate protests in London, police have said, in what organisers described as the biggest civil disobedience event in recent British history," the Guardian reported Monday in a recap of the weeklong climate actions.

6. Quote of the day
"If you could shrink the U.S.’s emissions to zero, but you do nothing for the rest of the world, you’ve done nothing."

Who said it: Cleantech expert and author Ramez Naam, speaking on a new podcast episode hosted by Nori, a voluntary carbon removal marketplace.

Context: Naam is discussing his view that the Green New Deal should place greater emphasis on policies that continue to slash the cost of climate-friendly tech that can be adopted in other nations — and not just for power and transportation.

A little more: Naam notes that the U.S. accounts for 15% of the world's emissions.

  • “It is all about driving down the cost of clean technology for the entire planet, so that the other 85% of emissions, the rest of the world, inexorably, out of their own shallow self-interest, even if they don’t care about climate change, switch to these clean technologies. That’s the way that we have the biggest lever on the world,” he said.

Go deeper: How to decarbonize America — and the world (TechCrunch)

Ben GemanAmy Harder