Geopolitics of Energy and the Shaping of the International Order

Posted on Posted in Analyses, Energy Security

By Dr. Filippos Proedrou, Vice-President KEDISA and Director of Research

Geopolitics of energy explores the intersection of energy, security, and international politics. In particular, it studies how developments in the energy field shape international politics and how these in their turn feed back into the energy field. Climate change considerations have ascended to a significant parameter in the geopolitics of energy, insofar they meddle with energy security concerns and policy, and for this reason they are incorporated into the study of the geopolitics of energy.

This brief paper aims to summarize the main developments in the field throughout 2016 and sketch out potential consequences for 2017 and onwards. It critically discusses the impact energy prices have on geopolitical balances and development, the energy policies of the main actors, and how they work together producing cooperative and conflictive patterns in the international field.


Spotlights of the energy puzzle in 2016

The Saudi Arabia-Iran clash, instability in the Middle East and low oil prices

Following on the trends of the previous years, a global energy glut persists due to the interplay of a number of factors, namely the shale revolution, increasing energy supply, and sluggish energy demand in both the developed world and the emerging economies. This has consistently kept prices at levels beneath 50 dollars per barrel throughout 2016. This state of play forges grave challenges for the energy-rich regimes of the Middle East and North Africa (MENA) region. OPEC’s leading country and swing producer, Saudi Arabia, has been willing to reconsider its policy of market share defense. This, however, has been far from unconditional. In particular, the energy summits that took place in 2016 have failed to yield any agreement absent Saudi Arabia’s will to shoulder the burden for lower exports and ensuing depressed revenues. The other OPEC members (and Russia), on the same footing, have also been loath to make generous concessions in their export quotas. This policy reflects their mounting fiscal difficulties (Fattouh & Sen, 2016). Autocratic oil-rich regimes, in general, are trapped between constituencies that will severely protest cuts in state provisions, and the low international oil price which suppresses their fiscal leverage. It is estimated that a price of 70-100 dollars per barrel is needed for these states to perpetuate their generous welfare and social policies and, in doing so, ensure their survival (Bressand, 2013: 27). As a result, they increase their exports with an eye to ensure that flows of petrodollars continue to feed their cashiers, albeit this policy undermines international oil prices and returns on exports. Ongoing disputes regarding market shares and levels of prices are further perplexed by the Saudi Arabia-Iran confrontation that is unfolding as a zero-sum game through proxy wars throughout the Middle East. Crucially, this clash also entails high military, subversion and surveillance operation costs, and hence represents a further drain on their spending capacity (Fischer, 2015; Haykel, 2016).


US energy independence, the Chinese leverage, and EU-Russia business-as-usual gas trade

At the same time, the US has substantially enhanced its energy security by means of its growing energy independence (with domestic shale oil and gas replacing oil imports), as well as by narrowing down its imports mostly to friendly exporters situated in the Western hemisphere. China’s slowed growth and climate-friendly investments, moreover, combine to avert securitization of energy supplies. This notwithstanding, China has pursued a dynamic energy policy in the South China Sea, with the clear target to render it a vast Chinese-owned exploration scheme in the following years.

The staying energy glut and suppressed energy prices, on the other hand, place Russia at a disadvantageous position, since they jeopardize the return of petro-prosperity as experienced in the 2000s. This has decisively (but not unreservedly) tilted the balance of power to the importers’ favor, a fact also reflected in the Power of Siberia bilateral gas deal, which China is not eager to finalize at the same time that it pushes for better terms of trade (such as upstream equity stakes and low prices). Despite the polemical rhetoric between Russia and the EU since 2014 in the background of their fallout over Ukraine, their gas trade has been sustained. This is due to both sides’ preference for business-as-usual solutions in the gas sector, rather than jeopardizing revenues and crucial energy quantities (Judge, Maltby & Sharples, 2016). From the EU standpoint, the integration of its single market and the greening of its energy mix constitute the basic ongoing pillars of its energy policy with an eye to provide low-cost, low-carbon security to an ailing EU economy. While these goals also retain a strong security underpinning against Russia’s energy role, stressed and supported mostly be the central and eastern European member-states, the exact shape of the Energy Union will crystallize both the priorities, as well as the concrete policy tools, through which the EU will endeavor to attain its energy security in the mid-term. In this contested geopolitically and commercially fluid landscape, pipeline politics and diplomacy as reflected in Nord Stream II, Turkish Stream and South Stream (which is for now withdrawn) negotiations seem to respond to domestic deliberations and purposes, rather than resonate with energy security interests and concerns.


Prospects for 2017

The risk of further destabilization in the MENA region

These energy developments create a haphazard security landscape. For one, persistent low prices may destabilize oil-rich regimes. Any such episode may have catalytic effects on the regional order, since it will influence the geopolitical balance of power, unstable territorial formations and the volatile balance between the Shiites and the Sunnis. While the risk for a direct military clash between Iran and Saudi Arabia remains low, the destabilization of any regime will certainly invite further foreign intervention, not least covertly.

Low prices, moreover, bear dire developmental repercussions for oil-rich states in North and sub-Saharan Africa and heighten the risk for domestic upheaval, which hardly ever remains contained within confined territories. The developmental potential and trajectory of energy exporters in the African continent is certain to be jeopardized in case low energy prices endure.


A premium for importers and its potential pitfall

Energy importers enjoy a generous indirect subsidy in their hardened budgets since they save massive amounts of money from imported energy at current prices. On the one hand, low prices serve to decelerate the pace of transition to clean energy, sustainable systems. Any upward movement of energy prices, on the other hand, will bear a significant cost on importers’ budgets. What is at stake here is whether low energy prices will lock-in importers to the perpetuation of fossil energy use (and in this context work to the benefit of fossil energy exporters in the mid-term), or whether the energy transition will continue and accelerate regardless of enticingly low energy prices.


The US-China scramble for control of energy resources and its geopolitical ramifications  

The traditional US-Saudi axis also comes under doubt on the grounds of the growing US energy independence, and in light of the nuclear deal with Iran. This notwithstanding, the US will retain a strategic interest in the functioning of the global market, since this closely affects both its own energy security and that of its allies, as well as global security and distribution of power considerations. In this context, the more likely scenario is that as long as the US cannot replace Saudi Arabia with another pivotal player in the broader region (like Iraq), Saudi Arabia will remain the most important US ally in the Middle East. In any case, whether Saudi Arabia retains its capital role, or is in the process of partially losing its pivotal place in US foreign policy, will probably be a long-drawn process. Likewise, the US will endeavor to retain control of the South China Sea and the adjacent Malacca Straits. Constraining China’s expansive policy in the South China Sea will also feature high in the US agenda, as this directly impacts on its allies’ well-being and their perception of the US as a hegemonic power. While Donald Trump’s election adds uncertainty as to the US future foreign policy course, especially in light of his stated intent to improve relations with China, this far from warrants a free hand for Beijing in its neighborhood.


Russia’s risk of adventurism

Russia’s first out-of-area military campaign after the dissolution of the Soviet Union, while strikingly successful in co-determining the course of events in the Syrian civil war and the fate of Bassar-Al-Assad’s regime, endangers an overstretch of fiscal means amidst depressed energy revenues and a lack of alternative income. This reality, compounded by the Ukrainian front which remains open, may create the need for the Kremlin to monetize further resources and/ or follow a more adventurous foreign policy. This may well be the outcome in case the regime feels overwhelmed by rising costs and puts its eggs on the nationalistic basket to arouse popular support and assuage any protests. The EU’s growing success in reducing its vulnerability to any potential gas supply cuts through the function of its interconnected gas market, however, provides dwindled leverage for Russia to use the energy weapon even in the most dependent EU members; this fact is compounded by Gazprom’s stark need (not least for its own corporate reasons) to sustain energy exports-induced income.


Stagnant pipeline diplomacy in the EU-Russia gas trade

In this background, the rationale for the construction of new pipelines appears substantially enfeebled. In case any one of them moves forward, it will the geopolitical reasons, rather than poor commercial logic, that will drive developments forward and most probably signify new patterns of alliance. In particular, Nord Stream II will signify renewed faith in the Russo-German cooperation; South Stream and Turkish Stream (in case Russian gas reaches the European market through this route) will signal Russia’s expanding influence in the Southeast European region and gas market; and the construction of Turkish Stream will reveal determination from both sides to foster closer Russo-Turkish ties.


Low or high energy prices for 2017 and beyond?

Low energy prices provide adverse signals for upstream investments. As a result, it is doubtful for how long contemporary conventional and unconventional energy production will suffice to keep prices down. Once the supply-demand balance reaches a different equilibrium, it will become evident that more supply will be needed; this will trigger an increase in prices, especially if matched by recovery from stagnation and signs of increased demand. These developments will then again prompt further investments. The time lag between the realization of further investments and production actually coming on the market will see higher prices, until supply meets demand once more.

This mainstream, conventional scenario may be toppled in case game-changer policies come to fruition. A bold step by the EU, still the most enthusiastic climate player in the global scene, for example, to ration fossil imports and/ or regulate energy standards in effect blocking unconventional (including shale) oil and gas imports would be an act with the power to transform the global energy market, especially to the extent that it would be followed by other countries. This would lead to demand destruction and herald the passage to a post-fossil era, which would inevitably be characterized by sweeping geopolitical ruptures and realignments  The more climate-change-induced consequences will make themselves apparent, the more demand for such policies will strengthen, albeit their implementation encounters multiple impediments (Øverland, 2015: 3533). This, hence, remains in all probability a mid-term scenario.