Energy Markets and the Crisis: Is the US Status as a Superpower at Risk? This article was originally published as part of a compilation Environmental Sustainability and the Financial Crisis: Linkages and Policy Recommendations — edited by Jennifer Clapp with the assistance of Linda Swanston.
Although energy markets and politics were not at the root of the financial/economic crisis, most would concur that the preceding increase in oil prices significantly contributed to the challenges most countries faced prior to the 2008 implosion of financial markets.
Much was at play as prices climbed. Some maintain that speculators did not influence the oil price volatility; however, even the US Commodities Future Trading Commission — which last year insisted that the spike in oil prices was just supply and demand at work — now suggests that its data was deeply flawed and that speculators played a role in driving wild swings in oil prices. If there was a lesson learned in the early days of this turmoil, it was that global markets were interconnected at all levels, making the lines of cause and effect impossible to draw with precision.
It was not long before the financial crisis turned into a global economic crisis. Energy markets were swept up in the tidal wave. By December, oil prices had collapsed to under US$34/barrel from the July 2008 peak of US$147/barrel. Since then, although prices have recovered (averaging approximately US$64/barrel in July 2009), the contraction of global demand combined with tight credit markets has taken the fizz out of the energy sector. Almost across the board, investment is down, from exploration to refining, from hydrocarbons to nuclear and alternative sources.
Attempts to understand what is unfolding and to predict what is to come have commanded the attention of experts and institutions everywhere. Still, little of the analysis thus far has addressed the impact of the financial crisis on the geopolitics of energy markets. Aside from the direct effect of a low oil price on the revenues of oil-producing nations and their state oil companies that now control approximately 80 percent of the world’s oil resources, there are indirect effects that might prove more significant. In particular, the effects on global security and global energy markets of the extremely vulnerable US financial position are crucial. This position is a consequence of its deepening status as a debtor nation, combined with the magnitude of its stimulus package. These factors have accelerated US fragility and sent that country, and by extension the world, into uncharted territory.
Energy Security for Oil Importing Nations
Previously, the predicament that oil-importing nations (particularly OECD countries) faced as prices rose was troublesome: declining terms of trade weakened their economies, which, among other impacts, sent inflationary pressures up and incomes down. On the other hand, the same high prices focused oil-importing nations’ attention on energy security. While talk of energy security has abated since late 2008, the issue still commands much attention from governments, especially of the world’s largest oil-importing nations.
For the US, the world’s biggest oil consumer — responsible for approximately 25 percent of global consumption — energy security equated to shifting and adding suppliers if possible, and providing incentives for developing alternative fuels domestically. As far as its interaction with Middle Eastern suppliers is concerned, it is hard to isolate the US energy strategy from the fight against terrorism, the war in Iraq and the Bush White House’s rhetoric of “us” against “them.” The only thread, mixed with all other messages, was a constant reminder that the US needed to make its “dependence on Middle Eastern oil a thing of the past.” In fact, US dependence on Middle Eastern oil is paltry. In the last few years, the US has imported approximately 58 percent of the crude oil and refined-petroleum products it consumed. Of these imports, the Middle East supplied 16 percent, with Saudi Arabia accounting for 11 percent.
In contrast, the situation facing Japan, and increasingly China and India, is remarkably different. Although Japan’s energy efficiency pursuits have translated into a decrease in oil consumption, it is still the third-largest world consumer — after the US and China — and the second-largest net oil importer. It is hard to make sense of Japan’s energy security strategy. Unlike most other countries, its dependency on one region, the Middle East, has increased from 70 percent in the mid-1980s to approximately 90 percent in the last few years.
This is a particularly vulnerable position for a country that imports almost all of its oil. China, on the other hand, is clearly acting strategically. Energy security is seen as a key issue for the country’s future development and its importance as an oil consumer and importer is rising dramatically. China went from self-sufficiency to importing 52 percent of its needs in recent years. Energy security has translated into hefty investments overseas in exploration and production, infrastructure projects, and equity participation in oil companies. Recent moves include substantial financing of exploration in Russia, Brazil and Ecuador in exchange for future supply guarantees. Although this strategy was already at play before the financial crisis, China used its hefty currency reserves to pursue its objectives aggressively in the first part of 2009. Its strategy is already paying off. Two years ago, over 50 percent of its imports came from the Middle East. While total Chinese consumption increased, dependence on that region decreased to 42 percent in 2008.
India’s dependency on foreign oil is also increasing substantially. Since 2007, it has become the world’s fifth-largest consumer. Oil exploration and production in India has not kept pace with demand. India imports almost 70 percent of its needs, with Saudi Arabia and Iran the primary suppliers. In fact, the Middle East accounts for 75 percent of total imports, or 53 percent of India’s total oil consumption. According to estimates from the US Energy Information Agency, India will become the fourth largest oil importer by 2025.
A full picture of the impact of the financial/economic crisis on the geopolitics of energy will take time to emerge, as we wait for data on new import patterns. The numbers show that it is not US dependency on the Middle East that might prove to be troublesome. Japan, China and India have much more reason to worry. Yet, when it comes to US energy security, members of the country’s defence establishment — including, the Pentagon, analysts and security consultants — have made their careers on convincing the government and general public that total control over the Strait of Hormuz is essential. And that control can only be achieved with billions in military expenditures. Their rationale is that one-fifth of the world’s production must travel through that narrow corridor, and even if the US is not a direct recipient of that oil, any disruptions would send prices skyrocketing. While the logic behind keeping prices stable still holds, the idea that the US is the only country able to ensure this stability does not. Now, the reality is that the US is giving Japan, China and India a free ride. This is an untenable position. Although the discourse in Washington has not turned to the Strait of Hormuz and the corresponding defence budget, the US cannot afford to continue to carry the costs of protecting that corridor. Eventually, it will have to either charge other countries for its military service or scale back its involvement.
If the might of the US has been diminishing in the last decade, the global financial/economic crisis has only served to accelerate this process. Whatever the US chooses to do, a profound change is inevitable in the way the country views itself and, equally importantly, in the way the world views the US. If recent decades highlighted the nation’s singular strength and its willingness to invest in the world’s stability, the decades to come will likely be marked by its ability to partner with others.