U.S. gas prices have hit a record high + are showing no signs of going down. That’s largely because oil companies are no longer incentivized to drill
Japan’s Gradual Military Reawakening
Tokyo has recently begun to focus on its own military capabilities.
By?Geopolitical Futures?- July 29, 2022
After its defeat in World War II, Japan was deprived of any military capability. Pursuant to Article 9 of its new constitution, which came into effect in 1947, the country was permitted only a defensive army called the Japan Self-Defense Forces. In 2014, Prime Minister Shinzo Abe’s government approved a reinterpretation of the constitution, allowing the Self-Defense Forces to provide material support to Japan’s allies in case of war. The reinterpretation was made official in 2015, after which Japan has started engaging in military cooperation with Australia, India, Taiwan, South Korea, Singapore, the United Kingdom and the United States.
Amid the war in Ukraine, an increasingly assertive China, and the nuclear threat from North Korea, Japan has recently begun to focus on its own military capabilities. Japan’s military expenditure is now the third highest in Asia, trailing only China and India. In the next five years, the government plans to sharply increase core defense spending (to 2 percent from 1 percent), a great deal of which is intended for modernization. The JSDF is more and more active in joint military exercises, most recently having accepted an invitation to participate alongside the U.S. and Australia in the Garuda Shield drills hosted by Indonesia.
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Japan and U.S. vow to defend open economic order amid threats from China and Russia
WASHINGTON –?The top foreign and economic officials of the United States and Japan on Friday vowed to work together to defend an open, rules-based international economic order and address the vulnerabilities in their supply chains for key technologies such as semiconductors during their first “two-plus-two” economic meeting.
The agreement underscored the growing awareness among the two close allies that enhancing economic security is vital for their overall security at a time when?China is increasing not only its military might, but also its economic clout in the Indo-Pacific. The talks also came as Russia’s war in Ukraine?creates food?and energy supply concerns.
Emphasizing their joint leadership in enhancing prosperity in the region and beyond, the two countries said in a statement that they will strive to make their economies “more competitive and resilient” and are “committed to countering threats to economic security and to the rules-based international economic order.”
They also came up with an action plan that focuses on efforts in four areas: strengthening supply chain resilience, countering economic coercion, securing critical technologies and infrastructure, and pursuing peace and prosperity through the rules-based economic order.
“We have been able to turn a new page toward further deepening the Japan-U.S. alliance,”?Economy, Trade and Industry Minister Koichi Hagiuda?said at the outset of the talks, which were co-hosted by U.S. Secretary of State Antony Blinken and U.S. Commerce Secretary Gina Raimondo in Washington.
Japan and the United States have long held “two-plus-two” talks involving the countries’ foreign and defense chiefs to discuss security issues, but the leaders of the two countries agreed in January this year to establish an economic version of the dialogues.
“As the world’s first— and third-largest economies, it is critical that we work together to defend the rules-based economic order, one in which all countries can participate, compete and prosper,” Blinken told the opening session.
Foreign Minister Yoshimasa Hayashi expressed concerns about “prominent” attempts to use economic influence unfairly and opaquely to modify the existing international order and highlighted the importance of discussing foreign policy and economic policy as “a unit” in dealing with such challenges.
Japan and the United States welcomed their progress in exploring the development of next-generation semiconductors, expected to be used for artificial intelligence, quantum computing and other purposes, and agreed to advance efforts to foster supply chain resilience in other sectors such as batteries and critical minerals. They also agreed to establish a new joint research hub for the development of next-generation chips.
The semiconductor supply chain has been?increasingly under scrutiny?as the coronavirus pandemic has triggered a global shortage of the essential components used in everything from smartphones and laptops to cars as well as national defense systems.
The United States is also mindful that the world’s semiconductor manufacturing capacity is concentrated in East Asia, with?Taiwan accounting for 20% of the global total?in 2019, followed by South Korea, Japan, China and the United States, according to a June 2021 report by the White House.
In the action plan, Japan and the United States also pledged to coordinate with other like-minded partners to “address and respond to economic coercion, effectively confront non-market policies and practices, and deliver calibrated messaging to the international community.”
Hagiuda said “Japan will quickly move to action” on next-generation semiconductor research and said Washington and Tokyo had agreed to launch a “new R&D organization” to establish a secure source of the vital components.
The research hub would be open for other “like-minded” countries to participate in, he said.
The two countries did not immediately release additional details of the plan, but the Nikkei newspaper earlier said it would be set up in Japan by the end of this year to research 2-nanometer semiconductor chips. It will include a prototype production line and should begin producing semiconductors by 2025, the newspaper said.
The two nations will also continue joint efforts to enhance export controls on critical and emerging technologies, including surveillance systems, so that they will not be misused by malicious actors.
There is growing concern that the use of surveillance tools and other technologies by authoritarian governments is leading to serious human rights abuses, such as censorship of political opposition, tracking of dissidents, intimidation of minority communities and the undermining of free expression.
Reiterating their condemnation of Russia’s aggression against Ukraine, Japan and the United States said they will work together to mitigate the impact of the war on energy and food markets.
They agreed to strengthen investment in the energy sector and ensure secure energy resources in the near term, including liquefied natural gas, in response to the current crisis, and pledged to work together to create more resilient nuclear supply chains.
“The United States and Japan stand for open, sustainable, and inclusive economic growth that delivers prosperity, upholds democratic values, reduces economic disparities, and protects human rights in the Indo-Pacific region and beyond,” the statement said.
The vision will also be promoted including through the?Indo-Pacific Economic Framework, a U.S.-led economic engagement initiative joined by more than a dozen countries including Japan, it added.
On ties with Russia, Hagiuda said he gained U.S. understanding about Japan’s intention to?keep its stake in the Sakhalin-2 oil and gas project?despite sanctions against Moscow by Washington, Tokyo and others following the Ukraine invasion.
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“There are voices calling for withdrawal. But it would mean our stake goes to a third country and Russia earns an enormous profit. We explained how keeping our stake is in line with sanctions, and I believe we gained U.S. understanding,” he said.
Japanese trading houses Mitsui & Co. and Mitsubishi Corp. hold a combined 22.5% stake in the project.
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WSJ: Exxon, Chevron, Shell Report Record Profits on High Energy Prices
Oil giants post $46 billion in combined profit in latest quarter, as they cashed in on rebounding energy demand
Exxon?XOM?4.63%?Mobil Corp.,?Chevron?Corp.?CVX?8.90%?and?Shell?SHEL?3.67%?PLC, the three largest Western oil companies, banked a record $46 billion in collective profits in the second quarter, fueled by the highest energy prices in over a decade and?lucrative oil-refining margins.
Exxon, the largest U.S. oil company, said Friday its second-quarter profit rose to $17.9 billion, its highest ever and nearly four times as much as the same period a year ago, citing rising oil and fuel production,?higher energy prices?and cost cuts. Rival Chevron also posted a record profit Friday of $11.6 billion, up from $3.1 billion in the same period last year.
The historic profits come as companies reap the benefits of record fuel-making margins following the shutdown of 3 million barrels a day of global refining capacity since the onset of the pandemic in 2020. Exxon Chief Executive Darren Woods said while refining margins have moderated recently, it’s a situation that could take years to fix until additional capacity comes online.
“Demand recovers, and we don’t have the capacity to meet that, which has led to record, record refining margins,” Mr. Woods said. “This will be a few-year price environment.”
On Thursday, Shell reported?its second consecutive record quarterly profit, hitting $16.7 billion in profit on a net current-cost-of-supplies basis, a figure similar to net income that U.S. oil companies report.
The companies’ banner profits mark a significant turnaround for an industry that hemorrhaged cash and saw scores of companies?file for bankruptcy?following the worldwide outbreak of Covid-19 in 2020. Exxon and Chevron posted historic losses that year, and Exxon got booted?from the Dow Jones Industrial Average?while energy sunk to less than 2.5% of the S&P 500.
But the cash the oil giants are generating has become a political touchpoint as high fuel prices?have emerged as a liability?for President Biden and Democrats in Congress ahead of?midterm elections in November. In June, Mr. Biden was asked if he would go after Exxon’s profits. “We’re going to make sure everybody knows Exxon’s profits,” he said. “Exxon made more money than God this year.”
Mr. Biden has called on the companies to increase oil and gas production as well as refining capacity to help lower fuel prices.
Exxon said it is working to meet global energy demand through its plans to expand early next year a refinery in Beaumont, Texas, by 250,000 barrels a day, the largest such expansion since 2012. It also noted it has boosted production in the Permian Basin of West Texas and New Mexico by 130,000 barrels of oil-equivalent a day compared with the first half of 2021.
“Those investments are really helping to increase production at a time when the world needs it most,” Exxon Chief Financial Officer Kathryn Mikells said, noting its capital and exploration spending was up about 40% year-over-year.
Exxon’s oil and gas production was up about 4% from the same period last year. Chevron’s oil-and-gas production declined globally about 7.4% compared with the same period a year ago, largely due to the end of projects in Thailand and Indonesia, though its production rose in the U.S. by about 3.2%.
“Supply is responding,” said Chevron Chief Financial Officer Pierre Breber.
Senate Democrats?struck a deal with a pivotal lawmaker, Sen. Joe Manchin (D., W.Va.), to help pave the way for a proposed $369 billion bill that would include tax incentives to put more money into green energy. It also has provisions that?benefit fossil fuel companies, including requiring the Interior Department to offer oil companies millions of federal acres onshore and offshore over the next decade.
Oil and gas demand?has roared back?as countries have lifted pandemic quarantine measures.?Western sanctions against Russian energy?have pushed commodity prices even higher. Now, as?the U.S. economy is contracting, the oil industry’s lofty earnings have become a rare bright spot for investors.
Oil and gas shares have outperformed the market this year, with the S&P 500 Energy index up about 35% since the start of 2022, compared with a 15% drop for the broader index. Since the start of 2022, Exxon and Chevron shares are up about 46% and 26%, respectively, while the energy sector has grown to more than 4% of the S&P 500.
Still, many institutional investors, such as pension and mutual funds, remain reluctant?to back fossil-fuel companies?primarily because of concerns about their impact on the climate and long-term questions about their profitability as some countries shift to greener energy. But, the companies’ recent performance has made the sector harder for those investors to ignore, said Mark Stoeckle, chief executive and senior portfolio manager of Adams Funds.
“When you have a sector that went from under 2.5% of the S&P 500 to over 4%, it gets everybody’s attention,” Mr. Stoeckle said. “If you ignored energy for the last seven or eight years, you were paid handsomely for doing so. Now, the landscape has changed.”
Exxon and Chevron shares were up Friday about 4.5% and 8%, respectively, on a day when U.S. crude prices climbed almost 4% to more than $100 per barrel.
Despite the record profits, Exxon and Chevron signaled they will stick with relatively conservative spending plans in the oil patch, instead choosing to reward investors and strengthen their finances. Exxon returned $7.6 billion to shareholders in the quarter. With a cash balance of $18.9 billion, a $12 billion increase from the end of 2021, Exxon’s ratio of net debt to capital dropped to 13%, which would help gird the company for an economic slowdown.
San Ramon, Calif.-based Chevron lifted the upper end of its share-repurchase program this year to as much as $15 billion, up from $10 billion, and paid off debt. Shell plans to buy back another $6 billion in shares over the next quarter, while also reducing its net debt.
One of the biggest drivers of the record profits for Exxon, Chevron and Shell were the highest fuel-making margins in recent memory. On Thursday, U.S. oil refiners?Valero Energy?Corp.?and?PBF Energy?Inc.?posted profits of $4.7 billion and $1.7 billion, respectively, the highest quarterly earnings since at least 1998 for Valero and 2012 for PBF, according to FactSet.
Analysts said refining earnings may have peaked in the second quarter. Fuel demand took a hit during the height of America’s summer driving season, as consumers balked at prices that hit a record national average of more than $5 a gallon in June.
As fears of an economic slowdown mount, it is unclear how deeply oil demand will be affected, analysts said. But average U.S. refining margins for gasoline and diesel have recently declined by 47% and 25%, respectively, from second-quarter levels, according to Houston investment bank Tudor, Pickering, Holt & Co.
Margins remain lofty compared with prior years and will continue to keep refining profitable at least through the third quarter, if not longer, analysts said.
Given the high amounts of cash oil companies are generating, they are likely to favor returning most of that to shareholders, said Ryan Todd, an oil-industry analyst at investment bank Piper Sandler Companies. But many oil companies are also working to build excess cash on their balance sheets after their harrowing experience in 2020, he said.
“It’s important for the long-term viability of the industry to show investors they have a business model that’s resilient through the cycle,” Mr. Todd said. “There’s always a cycle. The cycle’s going to turn.”
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Interesting and concerning...