With crude oil recently falling below zero per barrel thanks to a price war and the sudden pandemic, the future of oil is deeply uncertain. COVID-19 has brought global passenger transportation and trans-national trade to a near stand-still and oil storage on barges and in warehouses is filling up rapidly. The oil market is under immense pressure and is being squeezed dry by the difference between oversupply and under-demand.
A Perfect Storm
The oil crash has come after more than a decade of shifts away from oil, for reasons of climate concern about carbon output as well as due to the American shale fracking boom that brought down US reliance on conventional oil. OPEC does not have the ability to fix a worldwide economic crisis or even to put forward a concerted response.
With a problem on the supply side and a problem on the demand side, oil’s future is not looking bright. Despite some analysts saying the worst is now behind us when it comes to the oil market implosion, the overall question of how changes in the oil markets and the current crash will affect the future of energy and energy politics is a question that is well worth asking.
What Happens Next?
The future is going to be difficult for the oil and gas sector, with an estimated $100 billion USD globally in investment dollars on hold or canceled due to COVID-19 and the price crash. That’s not easy to come back from. Royal Dutch Shell reduced its dividend for the first time since World War Two. Low oil prices, however, could be a boon for infrastructure spending and present new opportunities for government subsidization of clean energy and research and development. American shale oil is also probably going to eventually need a bailout and will also face pressure to cut their production.
Assuming the market eventually stabilizes and recovers in some form, the oil of the future will increasingly flow from west to east, rather than the other way around as in previous times. This will have major implications for energy and financial markets as well as geopolitics, economics and foreign affairs.
The United States is already withdrawing troops, jets and Patriot missile batteries from Saudi Arabia. Although this may be mere maintenance or a move to gain more leverage over the kingdom, it was previously reported that US President Donald Trump pushed Saudi Arabia to cut oil production — which they did by April 12 — or else he would withdraw all US troops. US Congress, especially members whose districts were threatened by oil oversupply, showed that Saudi Arabia doesn’t have any magical hold on US policy and that KSA will potentially be pushed aside militarily and economically if it does not uphold its end of the relationship and consider US economic interests in terms of curbing global oil oversupply and protecting the US oil sector.
The current oil crash brings the whole US-Saudi relationship into sharp relief and shows that under the surface things have not been all sunshine and roses, despite the media and Trump Administration’s messaging and eagerness to leave the murder of Jamal Khashoggi behind.
Many countries will be majorly weakened and some smaller states may even fail as a result of the oil price crash. Heavily-sanctioned nations like Iran and Venezuela will undoubtedly have an even worse time trying to meet their public service and national security spending and may reach new levels of instability and unrest. Nigeria, Mexico and Iraq are also of particular concern with their struggles with drug cartels, crime and extremism. Almost all of Iraq’s budget income comes from oil, while Nigeria is just coming out a major economic downturn and is engaged in an ongoing fight against Islamic militants in the north. The crash of oil puts them under major pressure.
Big Oily Reset Button
In many ways the oil collapse is a geopolitical reset in disguise, as Meghan O’Sullivan wrote at Bloomberg. The past changeover from coil to oil turned the Middle East into a focal point of global geopolitics, while the US move into becoming an exporter of oil thanks to the shale revolution is also inevitably having an effect on its relations with oil-rich nations. The price crash of today is a chance for another change.
Now the price crash and post-COVID-19 recovery will bring many unstable countries and geopolitical problems into sharper focus and also present many large powers from China and the United States to India with the choice whether to focus on rebuilding their own economies and moving more towards nationalism or branching out and using soft power to increase their reach globally to help nations struggling to recover and also, potentially, provide military and security assistance to nations which are in a state of semi-collapse.
Steady Hands Needed During the Storm to Come
Certain nations like Iran and Venezuela should already be on US radar in terms of providing aid, since their full implosion would result in immense humanitarian suffering and regional chaos rather than any kind of neat regime change formula. The United States is in a strong position, but is still very vulnerable to large changes in the oil markets as has been seen.
There are opportunities for global cooperation in responding to the recovery from the oil crash as well as enormous risks of further instability and dramatic shifts in political alignment. One potential positive is that the United States and Western world may begin to more thoroughly rethink the centrality of Middle Eastern oil to markets and national economies.
As Serkan Birgel wrote optimistically for TRT World, “going forward, if the ‘dependence’ on Middle Eastern oil is ever to end or become less pivotal, or even if market competition is now to be the more dominate framework that relations are considered by, perhaps the time is nigh to question the extension of a carte blanche to the various irreligious authoritarian theocracies and dictatorships in the region.”