Global Energy and Security

by: Jonathan Bush

Interview with Dr. Bapat

How will US strategic interests change in the Middle East as US oil production comes closer to US consumption rate?

This is an interesting question, and I think the answer is still unfolding before us. US production was increasing since the Bush administration, accelerated under Obama, and is now reaching its bloom in the Trump administration. The new access to supply, coupled with a decrease in consumption, means lower prices for the US. This led to the argument that perhaps the US no longer needs the Middle East, which could accelerate an end to US defense agreements there, and more focus on other regions. For those in favor of Trump’s foreign policy, perhaps it also enables a new era where the US can draw on its own supply. The US may therefore seek cooperative management of the oil market with Russia and OPEC I generally am not sure that this is the case for a few reasons. First, despite the increase in supply in 2019 and decline of US imports overall, about 10-13% of US imports came from the Gulf. That is still somewhat significant. Second, if the US cares about its position as global superpower, protecting the transit of energy from the Middle East is a still a critical security objective. About a fifth originates in the Strait of Hormuz, and that supply is essential to Asia. Influencing that is critical in the twenty first century. If the US wants to maintain its current level of power, it likely will need to keep fulfilling this role. Of course, if an American administration chooses not to, that may shift behavior.

Has the oil crisis changed the view of capacity constraints of the US Strategic Petroleum Reserve?

The problem here was really COVID-19. The disease decreased demand, which allowed for storage facilities to grow their reserves to the point where they could not hold any additional oil. An analogy might be if an individual enjoys steak, and the price of beef is cheap, they may prefer to purchase hundreds of pounds and keep it in storage. Unless of course there is no storage, and then they cannot keep it anywhere. So, they do not buy it. If there is surplus beef, it must be sold, or it will rot. Oil fields need to be in use, or they will damage.

So, the solution here is to release some of the capacity (get it used or moved) and try to slow the production of the supply. The latter was attempted with Trump’s effort to scale back production from Russia, the US, and OPEC. The problem here is that once the price increases, you have a free-rider problem, where everyone will have incentives to break cooperation. As far as the strategic petroleum reserve, the US is trying to sell off some of its capacity. I do not think anyone has yet to question the need to have the SPR though. At least not anyone that I have talked to.

What are the ongoing security concerns for the EU with regards to dependency of Russian energy?

The ongoing concern is that Russia can use its control over the EU’s energy market to exert power over the bloc’s foreign policy. In a larger sense, as Russia’s cooperation with China deepens, the added concern is that both states could push European states away from the liberal order. Specifically, with their support, countries in NATO and the EU may be willing to deviate from both organizations’ objectives, or abandon basic commitments to democracy, either to obtain energy from Russia or because they can secure Russian energy. Russia’s objective over the last several years seems to have been to undermine both organizations by supporting rightist groups and spreading disinformation. So, in a nutshell, the concern is that if the EU is more dependent on Russia, its status as a key American security partner may be undermined. This is compounded by new energy pipelines – like Nord Stream – that seem to further deepen this cooperation. For a liberal, this is concerning. For someone more interested in transactionalism, this means that American gas will be even less competitive in Europe.

How should the US view the strengthening of Russian and Chinese relations with regards to energy cooperation?

There are two issues. First, a Russian/Chinese bloc would be a geopolitical competitor to the US. With China’s economic power and Russia’s present military, the combination could project power into most regions of the world. Second, infrastructure like the Siberia pipeline may make it easier for China to access Russia’s energy and settle these trades in non-dollar denominations. This could be a signal of decreasing demand for dollars in this arena. As far as China’s energy independence, it is unlikely that Russian imports alone can satisfy its demand. It will need Middle Eastern oil in the future to do so.  

The larger part of the question is how significant a threat is this? Although the political response to COVID-19 in the US seems lacking too much of the world, the Fed’s management has been comparatively better. Chairman Powell indicated that the US will continue to meet the world’s demand for dollars. Right now, dollars are looked at as the key safe asset. Neither the Chinese capital market nor the Russian market can compete. Because there is no other comparable asset, and because the Fed will continue providing it, US power over these two competitors remains in the economic realm. It is likely that both will cooperate to challenge the US in the military realm, particularly in the South China sea where there are rumored to be energy deposits. Harnessing these elements might push China toward energy independence, coupled by the potential discovery of oil in the west. But both of these haven’t happened yet, so China isn’t going to be energy independent any time soon.

How should the US and Allies view significant Chinese investment into African energy and infrastructure by both the Chinese government and Chinese corporations?

China has been the biggest investor in Africa since 2009. It invests not only in energy infrastructure, but also in urban infrastructure, roads, and phone lines. It is likely that China will also continue to push RMB in Africa as a safe asset. Long term, this may be a concern. Africa’s population is growing, its markets are not fully developed, and it has a whole lot of resources. Yet, the US commitment to the region seems to be declining. The Chinese are further ahead in building relationships there and are building on a history of anti-imperialism. There is a good bet that Chinese firms will always have the upper hand here compared to American ones. To look at the glass half full, one could argue that Africa’s economic markets are relatively small right now, so this is not too big a concern. The glass half empty is that they likely will not be forever.

What significant future changes to the energy sector do you foresee?

I think the key here is to think strategically. There is a substantial group of states that have incentives to keep the world dependent on hydrocarbons. When challenges like wind or solar emerge, these states usually flood the market with hydrocarbons, driven down the price, and push out the alternative fuels. This is changing. COVID-19 dropped demand to very low levels and it may take time for the world to recover. If the world can live with less energy consumption, it may be possible for alternative fuels to start competing again, particularly with a premium paid on sustainability. It is telling that despite the Trump administration’s efforts to bolster coal, the industry continues to lose share in the US. I do not think we are close to a world that no longer needs oil, but I do think we are seeing dropping demand and an increasing place for alternative fuels, particularly LNG. It is possible that we may also see wind and solar pick.