CLYDE KULL ⟩ Falling oil prices could trigger the next geopolitical shakeup

Oil tanker on the Texas, Houston port route. 29th of October 2021. Photo: TANNEN MAURY

• Falling oil prices mean instability.
• The green revolution is hindered by the low price of oil.
• Russia may end up in difficulties because of cheap energy.

At a time when global attention is focused on what is happening on the battlefields of Ukraine, Gaza and Lebanon, the recent drop in energy prices, which may have unpredictable consequences, has barely been noticed outside the relevant industries. Energy prices are often a factor in shaping global crises, and if the drop in oil and natural gas prices in recent months turns out not to be a temporary but a permanent trend, the impact could be comparable to a full-scale conflict, Ambassador Clyde Kull writes.

Over the past year, a number of factors, including interest rate cuts by the US Federal Reserve, signs of a struggling Chinese economy and concerns about economic growth in Europe, have contributed to a gradual decline in oil prices to 73 dollars a barrel from 120 dollars a barrel following Russia's invasion of Ukraine in February 2022. However, investors and analysts are uncertain whether this is a long-term trend. In addition to the uncertainty of the extent to which OPEC members, especially Saudi Arabia, will respond to the price drop and the opaque role of Russia, which is trying to avoid sanctions, several other factors could lead to major changes in global energy markets.

One of the most important of these is the transformation of the United States 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 gives Washington more opportunities to have a say in global energy prices is not yet clear. However, a scenario in which the US can reshape energy market developments in its own strategic interests could weaken Saudi Arabia and other OPEC countries.

If the current decline 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 three important development factors at the heart of current geopolitical crises and global political change: authoritarian regimes seeking military expansion, fragile states ravaged by civil war, and technological restructuring ensuring the transition to green energy in advanced democracies. An accelerating decline in oil and gas prices could strategically unbalance all three of these trends.

The impact of a sustained drop in energy prices would be felt the most by oil-exporting authoritarian regimes whose goal is to expand their sphere of influence, including through aggressive territory capture. A perfect example of this is Russia. 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 profitability of oil production has been calculated to be more than 94 dollars per barrel. Although Russia also has sources of income from other commodity markets, a sustained drop in oil prices would greatly complicate the ability to balance the current increase in military production with increased spending aimed at mitigating the social consequences of endless war on the Russian population.

Just as the drop in oil prices in the 1980s put the Soviet Union under enormous economic pressure, the Putin regime would face tough strategic choices that high oil prices have helped it avoid. While such a dynamic is unlikely to stop Putin's obsession with destroying Ukraine, the pressure it would put on the Russian economy could hamper his ability to pursue a war of attrition. Other social and economic factors are undoubtedly also important, but energy market trends are a variable that should be considered in any analysis of Russia's potential development direction.

If the current decline in energy prices proves to be permanent, it would have a huge impact on every region of the world.

The dynamics of falling energy prices, which are beyond OPEC's control, would also have a destabilizing effect on other ambitious authoritarian countries. With oil prices hovering between 50 dollars and 60 dollars a barrel, it is hard to imagine how Saudi Arabia can continue the extravagant program of urban construction and economic transformation that is at the heart of Crown Prince Mohammed bin Salman's legitimization of power. Similarly, lower oil prices would make it more difficult for Iran's theocratic regime, which is already struggling under US sanctions, to avoid economic disruptions that could fuel domestic unrest, and would also significantly limit Iran's ability to finance the proxy forces needed for regional dominance in the Middle East.

A drop in oil prices would also destabilize energy-producing countries that are already groaning under corruption and civil conflicts. In Libya, a drop in prices would intensify the fight between rival armed groups over control of oil and gas infrastructure, which would most likely lead to a resumption of civil war on multiple fronts across the country.

Tensions originating from low oil prices could have a similar destabilizing effect on countries facing economic crisis and insurgency, such as Nigeria and South Sudan. As a result of the further decline in revenue, Nigeria may lose control in most parts of the country. As jihadist insurgencies spread 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 permanent decline in energy prices would have a profound impact on oil-consuming economies as well. Although the long-term consequences are still unclear, it is hard to imagine how the transition to a carbon-neutral economy would not be affected by falling oil and gas prices, which are significantly lower than policymakers had anticipated. Now that prices are moving toward the 50 dollars level, it may be necessary to rework the calculations that have underpinned the cost of the transition when oil was above 100 dollars a barrel, whether it's the adoption of electric cars or the expansion of renewable energy sources.

If the average driver pays less at the gas station than originally expected, new incentives will have to be found to encourage the mass adoption of electric cars, a key goal of many green transition strategies. And the broader changes in consumer behavior needed to achieve deeper economic reforms will, in the face of much lower energy prices, require more active public intervention in both Europe and North America. Although there are many variables in the green transition processes of the US, the EU and even China, it is likely that many of the political initiatives designed to promote a carbon-free economy would not withstand such a large change in cost pressures in the current form.

Although energy prices are an important part of the global economic order, it would be wrong to say that geopolitical developments depend on them alone.

There are many other social, economic and political factors that are equally important to the fate of authoritarian regimes, struggling societies or the transition to carbon-neutral supply chains. A collapse in oil and gas prices will not suddenly halt the Putin regime's efforts to conquer Ukraine, guarantee a decisive victory for one side or the other in Libya, or completely prevent the transition to a carbon-free economy.

However, there are few other structural factors that affect as many different countries, trends and crises at once as oil and gas prices. As the strategies of all major powers are vulnerable to the dynamics of energy markets, sharp shifts in oil prices can turn seemingly strong regimes or political initiatives into a fragile house of cards. And if the current downward trend in energy prices turns out to be long-term, the once-invincible powers-that-be may take desperate measures when their intentions are shattered by the laws of market supply and demand.