COVID-19 and the global energy structure’s geopolitical framework

The US — one of the largest consumers of global energy from the 1950s till 2018 — is now emerging as a major energy supplier to the global energy market

By Nalin Kumar Mohapatra
Published: Friday 12 June 2020

The global economic slump that largely occurred in the past few months due to the novel coronavirus disease (COVID-19) pandemic is also putting a severe stress on the global energy structure. One interesting aspect of the present crisis, however, is that instead of “demand securitisation”, it is the “supply securitisation” that has emerged as a major challenge, as there are no takers for surplus oil in the market.

It may be recalled that in the 1980s — because of the Saudi Arabia-US negotiation — oil prices fell drastically, contributing to a sea change in the structure of the international energy market.

At the time, it was the then Soviet Union which faced the brunt of the problem because of a fall in energy prices.

A similar situation emerged during the 2008 financial crisis. The current situation, however, is quite different and a lot has changed over the years in the structural framework of energy security geopolitics.

The US — one of the largest consumers of global energy from the 1950s till 2018 — is now emerging as a major energy supplier to the global energy market. It is in this context that the present study offers a holistic perspective on this issue, which needs urgent attention for market stabilisation.

It may be underlined here that the glut in the energy market took place when major oil producers like Saudi Arabia and Russia — in the form of Soviet Union — representing the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC member countries, failed to arrive at a consensus over the production cut to boost oil market.

A similar price war occurred between these two in the 1980s: Former US President Ronald Regan entered into a secret agreement with the Saudi regime, as a result of which there was overproduction of oil by both countries.

This, in turn, contributed to a price crash which drained the then Soviet economy heavily. At that time, it used to depend heavily on export of oil to the international market.

This phenomenon is known as ‘rentier economy’ or the ‘Dutch diseases’ in the literature of political economy in International Relations.

What we have witnessed in the past few months is a sharp decline in global economic activity and consequent lesser demand for oil and gas in the international market.

The International Energy Agency (IEA) in its report published in April 2020 brought out some glaring figures concerning oil and gas sectors which highlight the impact of pandemics on the energy sector in totality.

The Global Energy Review 2020: The impacts of the COVID-19 crisis on global energy demand and CO2 emissions report highlighted energy demand dipped around “three per cent” because of the lockdown and slowdown at a global level.

Giving a sector-wise decline, the report said demand for oil declined by “five per cent” and gas by “two per cent”, according to data from the first quarter.

Similarly, the worst hit energy sector was coal, according to the report. The demand for coal in the international sector declined largely due to “low import by China” along with the global recession, the report said, adding there was a decline of coal to the extent of “eight per cent in comparison to the corresponding period of 2019”.

The conflict between Russia and Saudi Arabia — termed by many as a sort of energy war between “OPEC and non-OPEC members” — generated a lot of interest in the international energy market over what the contours of the energy game will be at the international market.

After a lot of rumbling and intense debate, on April 12, both Saudi Arabia and Russia formed a truce under which they agreed to bring production cuts through a special meeting called OPEC+ where 23 members of both groups participated.

They agreed for phase-wise production to stabilise the global energy market. The OPEC website in a press release on April 11, 2020 said the first phase starts from “May 1 to June 30”, during which oil production will cut to “9.7 millions of barrels per day (mb/d)”.

The second phase starts from “July 1 to December 31, during which the production cut will be 7.7 mb/d”.

Though the production cut was achieved after a long and tenuous deal by OPEC and non-OPEC members, the question that needs the most attention here is how far it will affect the oil market.

There are rumblings in the global geopolitical structure over whether the energy price fall will have an impact on the global balance of power or not.

Soon after the agreement was signed, Russian President Vladimir Putin — to minimise the existing conflict — said “they want to badly bite us. However, the options to do this are limited. There may be some impact”.

Though the Russian president said the oil production cut will not affect the country much, the reality is Russia heavily depends on export of energy resources to the foreign market to generate foreign exchange and sustain the post-2014 sanctioned economy.

Energy is the mainstay of Russia’s export-oriented economy, according to Weaker Global Outlook Sharpens Focus on Domestic Reforms: 42nd issue of the Russia Economic Report, a recent World Bank study from December 2019.

“Energy exports accounted for 65 per cent of total exports in 2018 (compared to 59 per cent in the previous year),” according to the study.

The decline in oil export along with production cut will put a severe strain on Russia’s financial exchequer.

Along with this, a considerable section of Russian energy experts and policy makers are of the opinion that because of climatic conditions, it will be difficult for Russia to restart its oil industries in Siberia and the far east, if production centres shut for a few days.

Opinions from many quarters said because of fall in the energy prices, Russia may restrategise its energy relations with European countries. It may be recalled here that like Russia, Caspian states are going to face this crisis in the near future because of price fall and production cut.

The US — which is emerging as a major shale power along with one of the largest exporters of liquefied natural gas — is also not immune the crisis.

When prices fell below “$20 per barrel” in the US, it sent a shockwave and threatened the closure of many shale industries.

The slowdown in oil industries may also aggravate the country’s unemployment rate. Storing crude is also another big headache for the country’s oil industries.

Another issue that confronts the US energy industry is that their profit margin hit four of the ‘Seven Sisters’: “Exxon Corporation, the ConocoPhillips Company, Schlumberger Ltd and the Halliburton Company lost $610 million, $610 million, $7.3 billion and $1 billion” respectively, in the first quarter of 2020.

Something intriguing about the US’ oil industries is that from being the largest contributor to the country’s treasury, they now depend on a rescue plan from the current administration of US President Donald Trump.

Though there is a global slump in energy industries which impacts the energy market, studies show there is a significant improvement in global climatic conditions.

The lockdown and closure of economic activities throughout the world also had an impact on climatic conditions. For instance, the IEA in its press release on April 30, said “CO2 emissions are set to fall by almost 8 per cent” in the first half of 2020.

The same study also said through there was a slowdown of the energy industry, there was also a bright future for the renewable energy sector.

“Lockdown measures are driving a major shift towards low carbon sources of electricity including wind, solar photovoltaic, hydropower and nuclear,” said the IEA press release.

Being the third largest consumer of global energy, India’s energy import from the external market is also affecting global energy structure, according to the IEA report.

Because of low prices, India imported and stored a huge quantity of oil and as stated by Union Petroleum Minister Dharmendra Pradhan, it was “equivalent to 20 per cent of India's demand”.

At the same time, looking at the prospects of the solar sector, India can fully harness its solar potential, which can ensure sustainable energy transition, the IEA report said.

A closer look at the above study showed there are four structural factors that emerge while looking at the pandemic with its impact on energy structure.

First is the dis-equilibrium (in the form of demand and supply) in the global energy sector due to the slowdown in the economy. Second, the agreement reached by OPEC+ will ensure a new global energy order in the form of generating consensus among major powers.

Third, the slowdown in the conventional energy sector also provides an opportunity for growth of the renewable energy sector as the IEA study confirms.

Finally, the pandemic provides an opportunity for energy consuming countries to have a greater say in the global energy market.

Nalin Kumar Mohapatra teaches at the School of International Studies, Jawaharlal Nehru University, New Delhi

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