With four new mega trends in 2014, are we about to witness a new world energy order?
I believe 2014 will go down in economic history for four major energy mega trends. One, China has overtaken the US as the world’s largest importer of crude oil. Two, the surge in US shale oil reserves and production made possible by hydraulic fracturing means the US could well overtake Saudi Arabia and Russia as the world’s leading energy producer. Three, the Kremlin’s decision to annex Crimea and amass combat troops in eastern Ukraine means East-West relations have now become the most bitter since the end of the Cold War and the collapse of the Soviet Union. Not even Russia’s war with Georgia or invasion of Chechnya provoked economic sanctions on this scale from the US and EU. Four, the nuclear agreement between Iran and the West could end decades of Western sanctions on Iran’s oil and gas, banking and shipping industries.
It is no exaggeration to state that the world is on the eve of an entirely new world energy order, whose first drafts will be written by energy journalists in 2014.
Brent crude oil had two price spikes in the recent past. Brent surged to $148 in the summer of 2008 before its $100 plunge after the failure of Lehman Brothers, the global banking crisis and the onset of worldwide recession. Brent also rose to $126 during the Libyan revolt against Colonel Gaddafi. Three years after the Brother Colonel’s and execution by rebels, Libya’s oil ports and terminals on the Mediterranean are controlled not by the Tripoli government but by rebel tribes/militias from the eastern regions near Benghazi. The escalation of the Ukraine crisis could prompt Russia under President Putin to retaliate with his “gas weapon” against Europe, which imports one-third of its natural gas from Gazprom. The world’s critical energy infrastructure — the Suez Canal, Sinai LNG plants, Algerian oilfields, the Northern pipeline from Iraqi Kurdistan to Turkey, the Basra region oilfields and storage depots in southern Iraq, Shell’s assets in the Niger Delta, disputed offshore fields in the South China Sea, oilfields and pipelines from Sudan to Venezuela all face varied geopolitical risks. This makes the world oil and gas market wildly unpredictable, making the risks of oil price spirals and crashes that much higher. This is hardly a positive development for a high carbon global economy that has seen a surge of energy disappointments. Examples include Japan’s Fukoshima nuclear reactor, the failed promise of Brazil’s offshore drilling boom, anti-fracking political opposition in Western Europe, China’s coal-polluted megacities and the fragility of oil exporting states such as Libya, Iraq, Nigeria, Venezuela, Algeria, Yemen and Sudan. Could the world be on the eve of a new, protracted oil and gas wars?
Coal, oil and gas have been the lifebloods of the global economy since the Industrial Revolution in Britain two centuries ago. The world would never have escaped the curse of Dr Malthus that had been humanity’s fate since the beginning of civilisation without the fossil fuels created by global warming 150 million years ago. Sheikh Yamani, the ex-Saudi oil minister, used to quip that the Stone Age did not end because the world ran out of stones. So the Hydrocarbon Age will not end because we run out of oil, gas and coal. In fact, the IEA estimates fossil fuel will account for three fourths of the global energy usage in 2035.
The West’s super majors (the Seven Sisters) once owned almost 90 per cent of the world’s proven oil and gas reserves before the establishment of the Opec in 1960. Now, Western multinational oil and gas majors, no matter how powerful, own a mere 10 per cent of global reserves. The world oil and gas markets are now vastly more complex, more expensive and more vulnerable to war, terrorism, sabotage or geopolitical risks. The budget break-even price of the lowest-cost Arab producer, the kingdom of Saudi Arabia, is now $90 Brent. Saudi Arabia will no longer be prepared or even fiscally able to play the role of “swing producer”, the central bank of oil, to stabilise oil markets during future energy crises. The real powerbrokers of global energy are now government owned oil and gas firms, from Gazprom to Sinopec, Petro China to Rosneft, Pemex to Petrobras, Saudi Aramco to Adnoc. Oil and gas is the key variable in economic growth, climate change, security alliances, financial markets and geopolitical rivalries.
The US shale oil revolution (driven by technology and the private sector, not White House dictate) is a game-changer in global energy markets. US Henry Hub natural gas prices are one third the prices Europe or Japan pays for its imported LNG. This “gas dividend” (coupled with China’s pollution and rising wage costs means global manufacturing supply chains will increasingly relocate to the United States. It is only a matter of time before the United States emerges as a global LNG exporter and finally consolidates the local, fragmented markets for gas.
As China gets wealthier, environmental activism will increasingly protest against the pollution and toxic carbon dioxide emissions that have caused long cancer epidemics in its coastal provinces. China, India, Turkey, Japan, South Korea, Egypt, etc, are all major energy importers who will be vulnerable to the new oil, gas and even coal wars. Energy will be the key currency of power in strategic and economic relations.
By: Sarie Khaled
The writer is a Dubai-based research analyst in energy and GCC economics.