Since late 2014, new oil supply and Organization of the Petroleum Exporting Countries (OPEC) decisions have pushed global prices down and ushered in a new era of energy abundance. Even as oil prices remain lower, U.S. shale producers have continued to contribute to global production and to add marginal supply whenever prices move up slightly. Furthermore, even as supply has increased, improved energy efficiency has reduced demand growth. Combined with difficulties in coordinating production cuts, these factors will likely keep the market sufficiently supplied going forward and maintain the lower prices, the recent rebound notwithstanding.
These developments have reset the connection between energy and geopolitics. Today, producers, not consumers, are bearing the primary risks in the new geopolitics of energy. For oil consumers, lower crude oil prices will reduce the tensions from supply uncertainty. Furthermore, moving away from a scarcity mindset can broaden energy and foreign policy options.
The United States, as a major consumer and a resurgent producer, is benefiting from this shift. Declining energy security tensions among large Asian consumer countries could open opportunities for U.S. engagement. Similarly, lower oil prices could set the stage for positive evolution in the Middle East as countries like Saudi Arabia are incentivized to refashion their oil-dependent economies.
The shift in power balance from producers to consumers will also create new challenges for the United States. U.S. policymakers will have to find ways to support producer countries facing instability in an era of declining oil revenues. U.S adversaries are taking advantage of this new uncertainty. Russia, for example, has used offers of budgetary support to extend its reach into unstable countries like Venezuela.
Lower prices will upend geopolitics globally. The changes are seen particularly clearly in three geographic areas:
- Russia: The new era of lower oil prices is a challenge to Russia and will moderately increase its dependence on outside investors for its energy industry, even as it allows Moscow to maneuver for influence in cash-strapped countries plagued by instability.
- The Middle East: Lower oil prices have created the opportunity for some level of U.S. disengagement from the Middle East. In the newly well-supplied global market, the necessity to intervene in the Middle East to maintain stability and quash price swings driven by geopolitical risk has decreased. However, the United States’ interests in the region go well beyond energy, and Washington still needs geopolitical stability in the Middle East to achieve its goals.
- South and East Asia: The two big rising Asian powers – China and India – are enormous beneficiaries of this new economic reality. For large-scale energy importers, low prices and more resilient supplies have almost no downsides. On the geopolitical side, China – as the more advanced country – has been able to take greater advantage of the new context than has India, though New Delhi appears to be moving to catch up. The United States needs to monitor developments in the region and be prepared to work with both countries on how to best capitalize on this new abundance.
To confront a changed energy geopolitics environment, the United States will need new economic and diplomatic strategies. The United States is well placed to capitalize on these opportunities through a three-pronged approach:
- Refocus energy diplomacy: Lower oil prices will require rethinking the foreign policy certainties of the past. To start this process, the National Security Council should initiate an inter-agency analytical exercise, coordinated by the National Intelligence Council, focused on understanding:
- How Russia is cultivating new influence abroad through energy ties, including how U.S. policy should create new economic options for energy-exporting countries so they have alternatives to Russian investment
- Whether or not China’s Belt and Road Initiative (BRI) is likely to move in a more mercantilist and anti-Western direction
- Whether efforts by Saudi Arabia and other key energy-producing U.S. allies to adapt to a post-oil world will succeed.
- Ensure global market stability through continued global engagement: The United States must keep oil markets open and ensure geopolitical stability worldwide to prevent price shocks or major supply adjustments. For this reason, the United States should not rely on its newfound energy abundance to reduce its global engagement. In the Middle East, it must recognize its continuing interest in the region’s stability. On BRI, the United States should work to shape the project with China rather than simply countering it, noting that such engagement benefits U.S. allies. Specifically, the United States should cooperate with China where there are mutual interests, while working to evolve Beijing’s investments toward greater transparency and sustainability. In countries facing budget instability, the United States must support economic diversification as a means of precluding capital injections from U.S. adversaries like Russia.
- Lead efforts to fight climate change: To keep employing energy diplomacy in an era of lower oil prices, the administration should engage in global efforts that address climate change. Such sustained engagement should continue regardless of the administration’s sentiments on the Paris Agreement. A clean energy future will depend on an open supply of newly key resources like rare-earth minerals and heavy metals. The U.S. administration should engage with resource-rich countries to protect open investment environments and stable access to those resources.
For more information about this report or to reach the researchers, please contact Madeline Christian at (202) 695-8166 or email@example.com.
The full report is available online.
More from CNAS
CommentaryWhy Stopping Environmental Crime Is a Matter of National Security
Last week, the presidency of the Financial Action Task Force, the global intergovernmental standard-setter for combatting illicit financial threats, passed from China to Germa...
By Neil Bhatiya
CommentaryEnergy Markets, Geopolitics, and COVID-19
On May 14, members of the CNAS Energy, Economics, and Security (EES) program held a Twitter conversation on the impact of COVID-19 on energy markets and geopolitics. EES Progr...
By Sam Dorshimer & Abigail Eineman
PodcastCovid‑19 and the oil price collapse
Rachel Ziemba, Adjunct Senior Fellow at the Center for a New American Security, joins Roland Rajah, the Lowy Institute’s Director of the International Economy Program, an...
By Rachel Ziemba, Roland Rajah & Rodger Shanahan
CommentaryNegative oil prices: Why Asian nations may struggle to take advantage
On 20 April, US oil futures closed in negative territory for the first time, implying that no one was willing to take physical delivery of some barrels of oil. While the unpre...
By Rachel Ziemba