- Falling oil prices mean instability.
- The green transition will be hindered by low oil prices.
- Russia could face difficulties due to cheap energy.
At a time when the world’s attention is focused on the battlefields of Ukraine, Gaza and Lebanon, the recent fall in energy prices has barely been noticed outside the sectors concerned, but could have unforeseen consequences. Energy prices are often a shaping factor in global crises, and if the fall in oil and natural gas prices in recent months proves to be a permanent trend rather than a momentary one, the impact could be comparable to a large-scale conflict, writes Ambassador Clyde Kull in Postimees.
Over the past year, a number of factors, including the US Federal Reserve’s interest rate cuts, signs of economic difficulties in China and concerns about economic growth in Europe, have contributed to a gradual decline in oil prices to $73 a barrel, compared with $120 a barrel following Russia’s invasion of Ukraine in February 2022. Investors and analysts, however, are unsure whether this is a long-term trend. In addition to the uncertainty over the extent to which OPEC member states, particularly Saudi Arabia, will react to the fall in prices and the opaque role of Russia, which is trying to avoid sanctions, a number of other factors could lead to major changes in global energy markets.
One of the most important of these is the transformation of the US from a net importer of energy to a leading exporter of oil and gas over the past five years. The extent to which US energy self-sufficiency will give Washington a greater say in global energy prices is not yet clear. However, a scenario where the US is able to reshape energy market developments in its own strategic interests could weaken Saudi Arabia and other OPEC countries.
If the current fall in energy prices proves to be permanent, it would have a huge impact on every region of the world. But it would also have serious consequences for the three major development factors at the heart of the current geopolitical crises and global political transformation: authoritarian regimes seeking military expansion, fragile states ravaged by civil war, and the technological transformations in developed democracies that will ensure the transition to green energy. The accelerating decline in oil and gas prices could throw all three trends out of balance in the strategic plan.
The most dramatic impact of a sustained fall in energy prices would be felt by oil-exporting authoritarian regimes seeking to expand their sphere of influence, including through aggressive territorial grabs. Russia is the most obvious example. President Vladimir Putin’s regime is directly dependent on energy export revenues to simultaneously wage a war of conquest against Ukraine and maintain economic prosperity at a level where the break-even price of oil production is estimated at over $94 per barrel. While Russia has sources of income from other commodity markets, a sustained fall in oil prices would make it much more difficult to offset the current military production surge with increased spending to mitigate the social consequences of the endless war on the Russian population.
Just as the fall in oil prices in the 1980s put the Soviet Union under enormous economic pressure, Putin’s regime would face tough strategic choices that high oil prices have helped it avoid. While such dynamics are unlikely to stop Putin’s obsession with destroying Ukraine, the pressure it would put on the Russian economy could hamper his ability to continue the war of attrition. Undoubtedly, other social and economic factors are also important, but trends in energy markets are a variable that should be taken into account in any analysis of Russia’s potential trajectory.
The dynamics of falling energy prices beyond OPEC’s control would have destabilising effects on other ambitious authoritarian states. With oil prices hovering between $50 and $60 a barrel, it is difficult to see how Saudi Arabia could continue the extravagant programme of urban development and economic change that is at the heart of the legitimisation of Crown Prince Mohammed bin Salman’s rule. Likewise, lower oil prices would make it difficult for Iran’s theocratic regime, already under US sanctions, to avoid the economic turmoil that could fuel domestic unrest and would also severely limit Iran’s ability to fund the proxy forces needed to dominate the Middle East regionally.
A fall in oil prices would also destabilise energy-producing countries already reeling from corruption and civil conflict. In Libya, a fall in prices would exacerbate the struggle between rival armed groups for control of oil and gas infrastructure, which would in all likelihood lead to a resurgence of civil war on several fronts across the country.
Tensions arising from low oil prices could have a similar destabilising effect on countries facing economic crisis and insurgency, such as Nigeria and South Sudan. Nigeria could lose control over a large part of the country due to a further decline in revenues. With jihadist insurgencies spreading rapidly across West Africa and the Sahel region, further deterioration in Libya and Nigeria would be felt across Africa, Europe and the Middle East.
Such a fundamental change in the global economy as a sustained fall in energy prices would also have a profound impact on oil-consuming economies. While the long-term consequences are still unclear, it is difficult to imagine how the transition to a carbon-neutral economy would not be affected by the fall in oil and gas prices, which are significantly lower than policymakers had anticipated. Now that prices are moving towards the $50 level, it may be necessary to recalculate the cost of the transition that has underpinned the cost of oil prices above $100 per barrel, be it the introduction of electric cars or the expansion of renewables.
If the average motorist pays less at the pump than originally expected, new incentives will have to be found to encourage the mass uptake of electric cars, which is a key objective of many green transition strategies. And the broader changes in consumer behaviour needed to achieve deeper economic reforms will require more active public intervention in the context of much lower energy prices, both in Europe and North America. While there are many variables in the green transition processes in the US, the EU and even China, it is likely that many of the policy initiatives designed to promote a decarbonised economy would not be able to withstand such a large change in cost pressures in their current form.
Although as important a part of the global economic order as energy prices are, it would be a mistake to claim that geopolitical developments depend on this alone.
The fate of authoritarian regimes, societies in difficulty or the transition to carbon-neutral supply chains have many other social, economic and political factors that are equally important. The collapse of oil and gas prices will not unexpectedly halt the Putin regime’s efforts to invade Ukraine, guarantee a decisive victory for one side or the other in Libya, or prevent a complete transition to a carbon-free economy.
However, there are few other structural factors that affect so many different countries, trends and crises at the same time as oil and gas prices. As the strategies of all major economies are vulnerable to the dynamics of energy markets, sharp shifts in oil prices can turn seemingly strong regimes or policy initiatives into a fragile house of cards. And if the current downward trend in energy prices proves to be long-lasting, once seemingly invincible power-holders may take desperate steps as their intentions are shattered by the laws of market supply and demand.