Windfall

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by Meghan L. O'Sullivan


  The economic effect of low prices rippled around the world—awakening it to the new energy abundance that had been building over previous years. For some oil importers, seemingly rock-bottom prices were an economic stimulus. They helped keep Europe’s growth modestly positive when the fundamentals might have pulled it in another direction. They injected a boost into the Chinese economy when the government might have not otherwise been willing to lift demand. In contrast, for some oil exporters, from Venezuela to Angola, low oil prices created immediate fiscal crises and doubts about the ability of governments to fund commitments.

  For others, low oil prices were a mixed blessing. In Japan, consumers welcomed relief from high energy prices, even while such prices frustrated the government’s efforts to combat persistent deflation. In the United States, consumers did not respond by spending more as they had in other periods of low oil prices. After the deepest recession since the Great Depression and years of slow economic recovery, many Americans preferred to save their dollars rather than splurge their savings from the pump. Similarly, the boost that stock markets traditionally received from low oil prices did not materialize. Energy companies worldwide almost uniformly swooned under the pressure of low prices, with the large oil corporations turning in their worst financial performances since the 2008 financial crisis. Stock markets around the world dipped, weighed down by poorly performing energy shares.

  As great as this immediate economic tumult was, the impact of the new energy abundance goes far beyond balance sheets and stock markets. In fact, changes in oil and gas markets have provoked massive global changes. As the world has lurched unexpectedly from energy scarcity to energy abundance in recent years, geopolitical mainstays have been upended. The low price of oil itself halted one of the biggest transfers of wealth in history, allowing consumers to save an estimated $3 trillion a year that they would have otherwise paid to producers.

  Low prices also changed the strategic orientation and priorities of countries around the globe. The United States, for example, has moved from being the world’s thirstiest consumer of overseas oil to a position of greater self-sufficiency. Among other impacts, this dynamic has helped temper predictions and perceptions of American decline. In Asia, bountiful American natural gas inadvertently and indirectly helped Japan manage the aftermath of the nuclear disaster at Fukushima, which had led to a suspension of the nuclear power generating a third of Japan’s electricity before the 2011 earthquake and tsunami. Plentiful oil both eased Chinese anxieties about meeting domestic needs and reduced predictions of inevitable conflicts over the pursuit of energy resources. This abundance even enabled China to broaden its foreign policy focus to embrace new priorities, such as exporting excess capacity and promoting “the Chinese dream.”

  In contrast to consumers, major oil producers who depend on oil as a primary source of revenue had their geopolitical wings clipped by the persistently low prices. Venezuela can no longer readily supply neighboring countries with cheap fuel oil, diminishing its ability to wield influence over regional politics and pushing the country to the brink of collapse. Low prices exposed the unsustainability of many socialist policies in Latin America, accelerating the end of a period of leftist politics throughout the continent. Another massive producer, Russia, is also finding it more difficult to translate its vast energy reserves into geopolitical influence in a low-energy-price environment. Pronouncements of Russia as “an energy superpower”—made just a decade ago—now sound absurd.

  More changes are undoubtedly to come. For one, Russia’s economic troubles could eventually deepen to a point where Moscow loses effective control of its autonomous republics, particularly those in the crisis-prone Caucasus, with consequences for Russia’s internal stability and security. Abundant energy is also complicating the seemingly historic rapprochement between Russia and China. More positively—if not derailed by politics—energy abundance could drive further integration between the U.S., Canadian, and Mexican economies, leading to the most competitive manufacturing zone in the world.

  The internal politics of countries are also being transformed. Continued low oil prices are straining, and could perhaps ultimately break, the social contract between the Saudi people and their rulers that has for so long underpinned Saudi stability and prosperity. This would only further stoke current Middle Eastern fires. At a minimum, these low prices are providing the leadership in Riyadh with a real impetus for serious economic reform. In Africa, countries from Mozambique to Uganda to Sierra Leone will be far harder pressed to capitalize on recent natural resource finds as sagging prices dash hopes of propelling their populations out of poverty. Iraq’s prospects are also even more sobering in the face of low oil prices. Petroleum revenue is necessary not only to keep ISIS at bay, but also to rebuild destroyed cities and help Baghdad keep provinces bound to the center.

  The likelihood that some of these geopolitical developments—and perhaps many more—will come to fruition increases the longer energy prices stay well below the level needed to keep producer budgets afloat. Yet, as important as price is, it is not the only way in which today’s new energy abundance is shaping geopolitics. We are seeing big changes in the structure of energy markets that will have their own geopolitical ramifications. For instance, the gradual but distinct movement away from regional natural gas markets toward a global one will make trade in natural gas harder to utilize as a geopolitical tool. Patterns of trade are shifting as the United States, the largest consumer of both oil and natural gas, becomes more self-sufficient in the first and nearly independent in the second, affecting the national conversation about U.S. global engagement. Old institutions, such as OPEC, have lost their vigor. As more countries discover and develop energy sources of their own, diminished dependencies will transform bilateral relations. In short, the new energy abundance shifts the world from a seller’s market to a buyer’s one, empowering consumers and wrenching geopolitical influence from producers.

  The new energy abundance is erasing the long-held vulnerabilities of some countries, creating leverage for weak states over strong, and offering new opportunities to address persistent challenges to the international order. It is both advancing and deterring efforts to combat climate change around the world. On the whole, the new energy abundance is a boon to American power—and a bane to Russian brawn. On balance, China is already a winner from this energy revolution, both from the lower energy prices it has brought and through the geopolitical opportunities that it now offers to Beijing. These new energy realities have presented unforeseen avenues of cooperation between the United States and China, while creating strains on long-standing partnerships between Washington and the capitals of the Gulf in the Middle East.

  The impact that energy has on geopolitics is no game at the margins. It will, in fact, be a major determinant of the international order or, rather, how the world works. It will alternatively hasten and help arrest the major trends now discernible to any global strategist: the corrosion of the rules and norms that have shaped the liberal international order since World War II, the shift of power and wealth from West to East, the push by Russia and China to establish spheres of influence, the rise of nonstate actors at the expense of sovereign governments, and the retrenchment of the United States and Europe from the global stage.

  Energy—its abundance, scarcity, price, method of production, et cetera—will not be the only factor shaping geopolitics in the years ahead. The future always has many engines. The pace of technological progress, the balance of power between countries, the durability of political alliances, the robustness of the global economy and its institutions, the vulnerability of fragile regimes, the distribution of natural endowments, the military strength of great powers, and the decisions of certain individuals will all play a role in charting the course of the next decade and beyond.

  But the vicissitudes of energy can and will influence each of these factors. And, in turn, energy will shape the conduct of foreign policy and national security and the conto
urs of global affairs. While this interaction itself is not novel, the energy dynamics at work have changed dramatically in the past decade. They are therefore sending new and different signals throughout the international system. How this new energy abundance unfolds will have a greater—if more diffuse—bearing on international affairs than many of the current issues that dominate headline news.

  This book concentrates primarily—although not exclusively—on the impact of energy changes in the oil and gas sector on global politics. This focus is not to imply that renewable sources of energy lack importance. To the contrary. We have begun to see renewables make real inroads into the world’s energy mix, particularly in the power sector where they are the fastest-growing source of electricity generation, albeit from a low base.

  Every major change in the global energy mix or in the energy system brings with it its own geopolitical ramifications. We should therefore expect the widespread deployment of renewable energy eventually to have major repercussions for global politics. These changes may take familiar forms, such as the formation of cartels not around oil, but around lithium and other critical resources. Or they could spur the need to manage state collapse among some oil producers, if renewable energy penetrates the transportation sector on a large scale. The energy poverty that currently keeps so many people from enjoying the fruits of growth could also be addressed more quickly than imagined. Yet at the same time, countries powered primarily by renewable energy may find themselves subject to new vulnerabilities as economies become heavily electrified. And to those who have battled the politics of pipelines, the politics of supergrids may become familiar. While renewable energy itself is unlikely to cross borders too often, the electricity it generates might, as will the technologies and know-how that give a country a competitive edge.

  These intriguing possibilities notwithstanding, for the time being, global politics are shaped far more by fossil fuels than by any other energy source. There are several reasons for this dominance. To begin with, fossil fuels still account for more than four-fifths of all the world’s energy, and will continue to be the main source for the foreseeable future. Even many scenarios that envision the world as successful in making the changes required to avert “catastrophic” climate change still posit that the majority of energy used globally will come from fossil fuels. Moreover, virtually all cross-border trade in energy is in fossil fuels; renewables are generally consumed in the country in which they are generated. As a result, a pipeline snaking across the Caspian Sea has many more geopolitical implications than a field of solar panels in Nevada’s desert. While the potential is large, cross-border electricity trade generated from renewable energy is still limited.

  Moreover, the exact geopolitical contours that this energy transition will take remain essentially unknown; they will depend in large part on which technologies and energy sources replace fossil fuels. In a 2014 book, Game Changers: Energy on the Move, Stanford and MIT faculty explore energy innovations in natural gas, solar photovoltaics, grid-scale storage, electric cars, and LED lighting. The big takeaways from that book are the sheer number of energy innovations bearing fruit or holding promise, and the wide variety of outcomes that could emerge over the coming years and decades. Given this, efforts to attribute broad geopolitical shifts to more sustainable energies in a systematic way necessitate some speculation, whereas the impact of oil and gas on geopolitics is clear and in the present.

  Roadmap

  This book is divided into three parts that, collectively, explain the new energy landscape and its impact on the world of foreign affairs and international security. The first section is devoted to illuminating the new energy abundance. Chapter One explains the forces of technology and politics that were behind the big price plunge beginning in 2014. Chapters Two and Three delve deeper into oil and gas, respectively, revealing how the new energy abundance shapes not just price, but also the structure of markets in ways that will be lasting and have geopolitical consequences.

  The second section of the book pertains to the new energy landscape and America, the genesis of many of the energy developments transforming global markets and geopolitics. Chapter Four looks at America’s misguided pursuit of energy independence, while the following two chapters examine how the new energy dynamics are reinforcing American sources of strength. Chapter Five looks at how energy is bolstering American hard power; Chapter Six focuses on the energy boom’s impact on American soft power. Chapter Seven examines the U.S. experience when it comes to the complex relationship between the energy boom and the environment and climate.

  The third section of the book focuses on the international arena beyond the Americas. Even though the boom in oil and gas production has been thus far largely limited to the United States, its geopolitical impacts are much broader. Because energy markets are global or regional in nature, and because of the huge footprint of the United States as a consumer and producer, the new oil and gas coming from North America reverberates beyond its borders. It is felt on every continent, in every country, to some degree. While Africa and Latin America are also affected by this new energy landscape, this book concentrates on the regions most likely to be the main drivers of global politics in the years ahead. Chapters Eight, Nine, Ten, and Eleven examine how the new energy abundance is transforming politics and international affairs in the important power centers of Europe, Russia, China, and the Middle East.

  Finally, the Conclusion takes a step back and considers the entirety of this complex landscape and offers thoughts for policymakers who are looking to do what great powers have done for centuries: use energy as either a means or an end to their grand strategies. In particular, it urges the United States to seize the good fortune of the energy boom not only by focusing on the economic benefits it brings at home, but also on the strategic advantages that can accrue to it in many parts of the world as a result of the new energy realities.

  SECTION ONE

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  The New Energy Abundance

  ONE

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  Behind the Price Plunge

  In 2005, New York Times columnist John Tierney made a $10,000 bet with Matt Simmons, an outspoken figure in the world of energy finance, over the future price of oil. Tierney had gotten in touch with Simmons after reading about his assessment that global oil production had hit a “peak” level, and his prediction that as a result, shortages would soon wreak havoc on the oil-dependent world. Peak oil, Simmons claimed, was a looming calamity for the global economy. Tierney was unconvinced. He had a strong belief in human ingenuity and the ability of technology to solve problems like decreasing oil reserves. So Tierney challenged Simmons to put a price on his prediction. After some friendly negotiation, each put $5,000 in escrow. The two agreed to focus on the price of oil at the end of 2010. If the average, inflation-adjusted price of oil for that year exceeded $200, Simmons would collect the full $10,000 plus interest. Otherwise, Tierney would be declared the winner and reap the gains.

  Simmons’s anticipation of a world where demand outpaced supply put him in good company in 2005. A wide spectrum of energy experts was also predicting rapidly increasing competition for oil and pursuant ruinous consequences. Among them was the U.S. intelligence community, which produces a report called Global Trends roughly every five years in order to give the president or president-elect its best assessment of what the world could look like fifteen to twenty years in the future. The report is the product of exhaustive and intense consultations with experts inside and outside the U.S. government, as well as from many countries around the world. As a result, Global Trends gives the best possible window into how the broadest number of internationally recognized experts saw dominant geostrategic trends and their implications for the future less than a decade ago.

  Energy—and increasing competition for dwindling resources—is a recurring theme in the Global Trends report produced in 2008. The expert
consensus at that time was that emerging economies would be ever more thirsty for energy, severely taxing the ability of supply growth to keep pace. The situation would be exacerbated by the declining oil output of many traditional, non-OPEC producers such as Norway, the U.K., Colombia, Argentina, and Indonesia. As a result, oil and natural gas production would be concentrated in fewer and fewer countries, the majority of them located in the increasingly politically volatile Middle East. Yet experts also anticipated that conflict driven by nervousness over energy security would extend well beyond the borders of that region. This growing competition for secure energy sources from the Arabian/Persian Gulf would drive naval competition and tension over sea lanes between the world’s greatest economic and military powers, including China, India, and the United States. New alliances would develop as countries sought to guarantee their access to resources in ways other than relying on the market.

  Other prominent policymakers and analysts saw similar trends at the time. In 2008, Nobuo Tanaka, then head of the Paris-based IEA, wrote that, if unaltered, “the course on which we are now set . . . would lead to possible energy-related conflict and social disruption.” In a similar vein, U.K. defense minister John Reid, on the eve of a 2006 summit between Prime Minister Tony Blair and environmentalist activists, predicted that the British military would need to deal with conflicts related to scarce energy and water resources in the years ahead.

  The future, however, did not arrive as predicted. In the years since then–newly elected President Barack Obama received his Global Trends briefing, the world has indeed seen an energy transformation. But it is an entirely different one than that anticipated by the hundreds of experts consulted for the Global Trends report. Rather than being dragged into an energy-scarce landscape, the world finds itself—very unexpectedly—in a situation of global energy abundance.

 

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