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Fuel could soon become a deflationary force

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Hello and welcome back to Energy Source.

The first auction for offshore wind leases along California’s coastline finished yesterday. It was a two-day bidding war that eventually drew more than $757mn in winning offers for the five leases up for grabs. The winners include familiar names, as European companies continue to hold dominance over the nascent American offshore wind business.

Norway’s Equinor won one of the licences. Germany’s RWE won another. France’s Engie and Spain’s EDP Renewables, under the snazzy joint venture name of Central California Offshore Wind LLC, will develop a project together. The companies will have to deploy floating wind technology (so far unproven in the US) at the sites because of the relatively deep waters off the west coast.

More offshore wind leases, including an auction scheduled for the oil-rich Gulf of Mexico waters, are expected next year as the administration of president Joe Biden tries to spur development of the lagging US industry.

Today’s newsletter looks at a stunning reversal on the energy landscape. Oil prices are suddenly down on the year while green inflation continues to run rampant. There are big implications for the pace of the energy transition. And on that same theme, Amanda reports that US power executives see the current renewables supply chain problems persisting at least until next year.

Thanks for reading. — Justin

Oil and fuel prices pull a U-turn

Brent oil prices closed yesterday at $77.41 a barrel, down nearly 20 per cent over the past month and slightly below where it opened the year in a big reversal from the price rises seen over the summer after Russia invaded Ukraine. The US WTI oil benchmark closed at $72.34/b.

And it isn’t just crude. Fuel prices are coming down as well, unlike periods of oil selling earlier this year when tight refining capacity kept diesel and petrol prices elevated.

The average price at the pump for petrol in the US is down to around $3.35 a gallon, about the same as this time last year. Diesel futures in New York are trading at around $2.80 a gallon, down 40 per cent from late October and just below where they were before Russia invaded Ukraine, pointing to dropping prices for truckers, farmers and others that rely on it.

Fuel, a major driver of the decades-high inflation rate over the past year, could soon actually start to be a deflationary force in the economy.

The forward curve is pointing to more price weakness ahead. The curve has now flipped from backwardation to so-called contango — meaning futures prices through next summer are now higher than the spot price. That is a sign that markets are oversupplied — a bearish signal for prices.

Fears that an economic slowdown will undermine demand are driving prices lower. Some of that demand weakness is already evident. In the US, petrol demand is running well behind last year’s levels and has been for months now. This week, the Energy Information Administration trimmed its global oil demand growth outlook. It now expects global consumption of liquid fuels to grow by 1mn barrels per day, a sharp deceleration from the post-coronavirus pandemic recovery and earlier expectations for 2023. The IEA and Opec have also cut their forecasts.

The period in which runaway post-pandemic demand recovery was outpacing suppliers’ ability to keep up looks to be passing.

At the same time, some of the big events that traders and analysts warned about have not played out. The oil price cap on Russian crude and European import and shipping restrictions have not significantly disrupted the flow of crude from Russia as feared — although that risk has not totally passed.

China’s move away from its zero-Covid restrictions has been seen as another potential booster for oil prices. That appears to be happening now. But it’s likely to be a slow process and the economic damage done by the extended lockdowns won’t be easy to undo.

Low global inventories of crude and fuel mean energy markets remain vulnerable to supply disruptions. But for now the price bears are in control.

Teslas aren’t getting any cheaper . . .

While oil and fuel prices are coming down, battery costs are suddenly on the rise, which could slow the rollout of electric vehicles and grid-scale energy storage.

After a decade of sharp decreases, the average price for a lithium-ion battery pack jumped 7 per cent this year to $151 per kilowatt hour, according to Bloomberg New Energy Finance’s closely watched annual survey. The group expects another small increase next year as well before costs start to fall again.

Column chart of Total price for lithium-ion battery pack, $ per kilowatt hour showing Battery prices rise for first time in a decade

The findings are not a huge surprise. Prices for critical battery inputs, such as lithium, cobalt and nickel, have soared this year, largely because of high battery demand and Russia’s invasion of Ukraine. Tesla, GM and other automakers have blamed the rising costs for pushing higher prices on to electric vehicle customers.

Still, it’s a big setback for the sector. The industry has used $100/kWh as a sort of magic number at which point batteries become broadly cost competitive with internal combustion vehicles. BNEF says the cost increases mean that milestone now will not be hit until 2026, two years later than expected.

That forecast assumes that material costs will stabilise and start falling after next year. But analysts at Cowen, an investment bank, warn that if commodity inflation persists, that parity might not be reached until 2029.

Costs are also on the rise for traditional petrol-powered vehicles, which complicates this calculus. But the rising cost of batteries will make it difficult for carmakers to roll out the sort of more affordable, mass market electric vehicles needed to propel EVs into the mainstream.

Data Drill

Clean energy supply chain challenges will not disappear any time soon, says Deloitte in its new US energy outlook. The consultancy expects project delays and rising costs for materials to continue into 2023 amid growing demand for renewables.

Over half of US power executives surveyed in the outlook said it will take more than two to three years to ease supply chain challenges despite growth in domestic manufacturing. Nearly a fifth said they did not expect supply chains to keep up with the growth in demand.

The Inflation Reduction Act, the landmark US climate bill, included billions of dollars in incentives to spur domestic manufacturing. A number of clean energy projects have been announced since the bill’s passage, including a $1.1bn investment from First Solar, an American solar panel manufacturer, to build a facility in Alabama in November.

A combination of trade issues, inflation, project delays and rising interest rates has hampered renewable energy’s growth this year. According to an IEA report released earlier this week, US renewable capacity additions are expected to decrease 20 per cent in 2022 due to higher costs and supply chain challenges.

US manufacturers produced 5GW of solar modules in 2021, less than a fifth of total installed solar capacity that year, according to Deloitte. To meet demand, the consultancy expects the US to remain reliant on foreign supply chains even in the long term.

“We’re still going to need global supply . . . To meet the growth that we have in the US plus the growth globally, it’s going to be an all of the above situation,” said Marlene Motyka, US renewable energy leader at Deloitte.

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Power Points

  • Norway’s sovereign wealth fund, financed by the country’s oil riches, will vote against companies that do not have net zero plans.

  • How a Russian oil tanker tried to disguise itself.

  • Australian mining billionaire Andrew Forrest has become the country’s largest renewables player with a $2.7bn wind acquisition

  • Petrobras’s chief executive is out as president-elect Luiz Inácio Lula da Silva prepares to return to power, signalling a strategic shift for the state-owned oil producer.

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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