energy | Geopolitics becoming main driver of global oil prices

Geopolitics becoming main driver of global oil prices

Todd Royal April 21, 2017 3:01 AM (UTC+8)
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The first summit earlier this month between US President Donald Trump and Chinese counterpart Xi Jinping focused on the North Korean nuclear threat and trade accords between the two global superpowers. The impact of the two-day meeting will also affect fossil fuel and related energy policy for Asia and the world more than any action by Opec or the prices set by major oil producers.

China is now the largest buyer of US oil exports, according to Bloomberg. And since Beijing has blocked North Korean coal imports to sanction Pyongyang for its nuclear and ballistic missile programs, China is buying US coal instead. The coal blockade indirectly helps Trump fulfill a continued pledge of “putting US coal miners back to work.” China’s economy is still dependent on the country’s coal-fired power plants, and the move to buy more US coal in support of UN sanctions against North Korea illustrates how geopolitics will drive energy policy.

Additionally, Chinese concerns over a US missile system being deployed in South Korea and possibly in Japan are reasons the Asian markets should be cautious about investing or taking hedge positions based on lower or higher oil prices.

Oil price affected by a variety of factors

The geopolitical convulsions this year — and that began in 2014 for oil markets — are the manifestations of much deeper forces at play throughout Asia. The US “pivot” to Asia during the administration of President Barack Obama didn’t affect oil prices. Rather, China’s economic slowdown, lower demand after decades of record growth, and crushing debt are more important for oil prices than any US policy change that doesn’t involve military force.

These economic and geopolitical factors are issues the Trump administration will attempt to exploit along with risky Chinese corporate debt. Energy policy will become a weapon as much as a US Navy carrier strike group en route to the Korean Peninsula

These economic and geopolitical factors are issues the Trump administration will attempt to exploit along with risky Chinese corporate debt. Energy policy will become a weapon as much as a US Navy carrier strike group en route to the Korean Peninsula.

Trump’s pro-fossil fuel energy agenda benefiting US shale oil producers, major energy firms, and coal companies is an opportunity to use oil sales as an economic weapon to deal with global foreign policy uncertainty.

Saudi Arabia is attempting the same tactic by instigating an oil price war in Europe against Russia, Iraq and Iran who have been cutting into Saudi’s lucrative European markets. The Saudis, moreover are slashing oil export prices in Asia to maintain market share and have a geopolitical counter against the Shia Iranian government that is warring against Sunni Middle Eastern governments backed by Saudi Arabia. Oil is the new weapon of choice in economics and geopolitical nation state conflict.

Jason Bordoff, a former energy advisor to President Obama and now director of Columbia University’s Center on Global Energy Policy says:

“The US is expected to produce more oil [and export it] over the next several decades — which puts the US in a stronger position to have conversations around the world. If a future US president wants to persuade other leaders to not buy oil from a particular nation, it could help that the US can step in and provide oil.”

Political risk will determine oil supply and price

Under Trump, American energy is no longer neutral. Simply put, he will use economics — energy in particular, as a weapon — the way former presidents used the military. And that has major implications for Asia. Political risk will determine extraction and production every bit as much as recoverable assets and lower fossil fuel break-even points.

Moreover, because of US shale oil production, the days of higher prices are likely over, unless war erupts between major powers. Libyan political instability, Venezuelan production going offline, and Nigerian unpredictability are also reasons for Asia to plan for geopolitical risk.

The world is still awash in oil. However, if Iran and Russia continue cooperation, then whatever political issues affecting Libya, Venezuela or even Nigeria will be offset by Iran and Russia bringing their oil to market making up for shortfalls. But there is a downside to this cooperation echoed by Matthew Kroenig of the Atlantic Council, a US-based think tank:

“Nato must be able to deter a Russian nuclear attack, counter the nuclear coercion inherent in Russia’s hybrid warfare strategy, and assure Nato members that the Alliance is prepared to defend them. This requires strengthening Nato’s existing nuclear deterrence strategy and capability.”

Oil price hike linked to nuclear deterrence

Kroenig and the Council on Foreign Relations believe Europe should have additional nuclear weapons to deter Russian and Iranian influence. These geopolitical moves would cause oil prices to rise significantly if every European country in Nato acquired the so-called nuclear triad — land-based intercontinental ballistic missiles, strategic bombers, and submarine-launched ballistic missiles.

Trump’s policy of having energy, national security and geopolitics comingled will help US shale oil firms to continue as production leaders and keep introducing innovations to increase output and lower prices.

President Xi doesn’t want a war between the US and North Korea with China caught in the middle. If Xi decides to support harsher sanctions against North Korea to secure stability, “in what is the equivalent of an election year in one-party China,” then millions of barrels of oil sold to the Chinese at below-market prices from the US and Saudi Arabia could solve one of the deadliest geopolitical standoffs in the world.

Since cheaper oil hit the market, Saudi foreign reserves have fallen from US$746 billion in 2014 to US$536 billion in 2016. The US shale oil revolution and the election of Donald Trump will deeply affect oil and gas markets this year. The surprise airstrike on a Syrian airfield by the US has added geopolitical risk to the price of crude in Asia and across the world. Geopolitical events are now interlocked and could move oil prices in ways we haven’t seen since the Opec oil embargo in 1973.

 

 

Todd Royal
Todd Royal is a former public official in Los Angeles, received his masters in public policy (MPP) with highest honors from Pepperdine University in 2015 and has over 40 publications to his name. He has been a co-author on a US$442 billion worldwide economic study on the furniture industry from Duke University and is published by the US Library of Congress for his work on the US fracking business, economic recovery and the geopolitical implications of expanded US oil and gas domestic production. Todd is from southern California where he is a consultant on geopolitics, energy and US state and local government.
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