A Looming Energy Crisis: Balancing States’ National Interests

November 08, 2022

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Introduction

Realism is a cornerstone of international politics and a crucial theory in this field of study because it assists in our comprehension of the difficulties we currently face as well as the modern world. With the conviction that all states are driven by their own self-interests, prioritizing territorial integrity and securing political autonomy, realism helps to emphasize this role of the nation-state. The greatest way to discuss international policy and national interests is through realist viewpoints. It shows how problems such as economic globalization are now a component of a state’s foreign policy and national interests. This demonstrates that states typically pursue their own vested interests rather than common goals. A state cannot take part in international politics without having an interest, as the European gas issue also demonstrates. A silver lining was that the U.S. and its allies were presented with the opportunity to impose sanctions as a result of the invasion of Ukraine to stymie Russia’s economy and weaken its attacks on Kyiv. In retaliation, Moscow cut off the oil supplies to European countries that imposed sanctions. The construction of the Nord Stream pipeline has been supported by the British and American governments on the grounds that the then-planned Turkey-Austria gas pipeline cannot efficiently supply gas to Europe. These defenses are based on a gas dispute with Turkey, where Russia delayed supply due to diplomatic considerations. As a result of the potential benefits to them in the future, the U.S. and the UK have been backing the development of the Nord Stream pipeline. Russia cannot be forced to give up Nabucco because it is also a major power.¹

 

The events of cutting oil supply by two million barrels a day by OPEC+ sent shock waves across the world, ringing a bell of the oil embargo of 1973. Although this is a different story, the repercussions carry a similar impact on the U.S. and Europe. By imposing an oil embargo in 1973, the Arab branch of OPEC briefly succeeded in wielding oil as a political tool to exert pressure on the West. As a result, the Gulf states’ interests do not coincide with those of the U.S., paving a way for animosity between the two sides. This jarring awakening forced Western countries to reconsider their energy strategies, which eventually turned the greatest strength of Arab oil producers into their biggest weakness. Although the 1973 oil crisis was not the first instance of oil being used as a weapon and is unlikely to be the last, it was the one that had the biggest impact on countries that depended on oil. This raises a few questions: What does the future hold for U.S.-OPEC relations, especially U.S.-Saudi Arabia relationship? What is the impact of this energy crisis on the upcoming midterm elections?

 

Deep oil production cuts approved by OPEC+ rocked the energy markets, placing the cartel on a collision path with the United States. The OPEC cartel decided to limit their daily output by 2 million barrels. The action raises the possibility of additional inflationary pressures on an already struggling global economy. The ramifications are extensive, affecting everything from the price of oil to how the U.S. and Saudi Arabia will interact in the future. This decision is anticipated to increase gas prices at the pump, possibly dealing Biden a severe blow before the November midterm elections, while also assisting Russia in overcoming a partial European oil import sanction. The timing of the cuts for the Democrats could not have been worse. Falling gas prices and voter fervor regarding access to abortion following the Supreme Court’s decision to uphold the procedure’s ban have managed to blunt what was formerly a sharp Republican weapon and increased the chances for Democrats in the upcoming November elections. But with the OPEC+ declaration, crude and gas prices have now reversed direction and increased significantly, which is woeful tidings for Democrats given that gas costs frequently have a significant impact on the American psyche. The political fallout for Biden and Democrats might be significant as they try to maintain a majority in the midterm elections later this month. The U.S. continuing to release crude from its emergency oil stockpile has irked the Gulf oil producers who are members of the cartel. The implementation of a price limit on Russian oil exports has also been spearheaded by Washington. The Gulf states worry that, should the idea succeed, the price cap might eventually be extended to them or might lower the price of their own oil. 

 

 

Hyper Dollarization

Cutting production will increase prices and the value of the dollar in ways that undermine the Fed’s goals, including stifling inflation, if oil supply shocks increase demand for dollar liquidity in a time of growing dollar scarcity and rising interest rates are suppressing demand generally.

 

The U.S. Dollar Index (DXY) is close to the record highs of the dot-com bubble era at 112.7 (most recently 114.5). Some fear that we are entering a period of hyper-dollarization, which could see us surpass the previous high of 120, possibly reaching 150 or even 175, smashing other currencies, before collapsing, with significant ramifications for the dollar’s status as a supranational currency and the overall state of the global economy.

 

The Fed is currently experimenting with new methods to encourage more liquidity while increasing interest rates and purchasing dollars, but these strategies are undercut by production cuts. Additionally, when the value of the dollar rises and more than 90% of the world’s oil transactions are conducted in dollars, the money that the OPEC+ countries gain is worth more and more. These victories enable them to accumulate cash while also offsetting losses brought on by unstable bond markets, global economic downturns, risks posed by the euro and the pound, and continuous Fed activities that are not likely to stop anytime soon. Concerning the effect on Europe, it will oblige governments to increase their subsidies to tamp down still-growing energy prices, placing them in a more perilous financial situation.

 

Again, it will increase the cost of USD by increasing the demand for dollar liquidity in a market that is already under pressure, which will put downward pressure on European currencies and other currencies. Currently, it is difficult to envision the West lifting its sanctions against Russia. Similar to this, the Fed is dedicated to reducing inflation regardless of the effects on the world economy. The OPEC+ cuts are unpopular in Europe for the simple reason that they will raise already prohibitive energy prices. More than this, though, some people fear that it would further weaken the EU, which was founded in part to oppose US hegemony, and that this will force Europe farther closer to the U.S. and its efforts to decouple from China.

 

The decision by OPEC+ to reduce production by 2 million barrels per day, coming at a time when the world economy is still suffering from the effects of Russia’s invasion of Ukraine and Western sanctions, shows that the cartel and Russia share certain common interests as oil producers, and that oil and politics are now inextricably linked.

 

The claim that Saudi Arabia has allied with Russia is absurd. Instead, events affecting the global oil market, including Western sanctions, rising US interest rates, and a decline in demand, have prompted OPEC to act in ways that reflect the interests of major oil producers, including Russia. The EU did, however, just agree to a price ceiling on Russian oil shipments and a ban on the majority of crude oil imports. Russia will thus lose market share. Moscow’s financial losses will be mitigated by OPEC+ reduction. These measures harm the economies of the U.S. and EU. Thus, this policy benefits Russia as a side effect.

 

Despite all these influences, the cartel’s unexpected severe oil production cuts will also tighten supply to the West, which is already suffering from record energy prices. The prices of gasoline and diesel would undoubtedly rise due to a lack of supplies, which will further worsen inflation. Oil-producing countries benefit from a sharp decline in output, but consumers may see significant price increases. It is even successful in stopping the flow of funds to the Kremlin thanks to the cap on Russian crude. President Biden is compelled to think about increasing market supplies from the US Strategic Petroleum Reserve. One of the key Western methods for eroding Moscow’s war chest has been chewing away at US and EU restrictions on Russian energy.

 

The OPEC+ decision would, however, benefit Russia as an oil exporter, since Moscow will not have to cut a single barrel of output as it is already producing well below the agreed level while profiting from higher oil prices. By establishing that OPEC+ has essentially sided with the Kremlin, which enables Moscow to refill its coffers and to limit the effects of US and EU sanctions, the ramifications for Russia and, by extension, for the war in Ukraine will become clear.

 

 

Reaction of the United States 

The OPEC+ group was charged by the White House with aligning with Russia and harming the world economy. Calling for a more responsible measure to increase domestic energy production, pointing to potential reactions that would include additional releases from the national Strategic Petroleum Reserve as required, Biden will continue to oversee releases from the Strategic Petroleum Reserve in Washington. Given the OPEC+ decision, it presented the United States with two golden opportunities to limit the impact. After the White House denounced the action, three legislators unveiled a bill that would effectively declare Saudi Arabia to be no longer an ally of the United States and order American soldiers to leave both Saudi Arabia and the United Arab Emirates. It is still unclear if Congress will take it up before the year. In my opinion, that is highly unlikely, given that Saudi Arabia is an essential security partner of the United States in its quest to establish Israel as a welcome country among Arab states. 

 

Along with that, the Biden administration promised to consult Congress on how to limit OPEC’s grip over oil pricing. The announcement called for the revival of the so-called “NOPEC” law, which would target oil cartels by enabling the Department of Justice to file lawsuits against nations for engaging in anti-competitive behavior. Additionally, Congress is seeking ways to boost US energy outputs and lessen OPEC’s influence over world prices. The Bill would classify OPEC as a cartel and subject its participants to the Sherman Antitrust Act. The US legislation may subject OPEC members and allies to legal action for coordinating supply disruptions that drive up petroleum prices globally. 

 

Energy analysts think that Saudi Arabia, the leader of OPEC and a close ally of the United States, may end up paying for the drastic production cuts, especially in light of Biden’s indication that Congress will soon try to limit the influence of the Middle Eastern-dominated organization over energy pricing.

 

 

Conclusion

In a nutshell: in the short-term, the global energy crisis stems from the Russia-Ukraine war. War involving a major oil producer always roils the global oil market. Global oil markets are always volatile when a major oil producer is engaged in a war. The disruption has been compounded by Western sanctions on Russian oil, including the G7’s forthcoming oil price cap, which has (in part) invited tit-for-tat retaliation by Russia and OPEC oil producers. Overall, this has caused a spike in spot market prices as well as a fear of future market scarcity, which is raising prices even more. While in the long-term, the pressure on pricing is caused by inadequate transitional investment in O&G production assets, as markets worry that these assets would become stranded assets, as nations and markets shift toward renewables and green technologies.

 

In terms of policy, the best combination would be to help vulnerable low- and middle-income households and small- and medium-sized businesses with subsidies and transfer payments along with rewards for conserving energy and penalties for overusing it.

 

The world’s biggest oil-importing nations are attempting to harness the power of energy politics to hold oil exporters accountable when they cross certain boundaries, suggesting that this weapon has evolved into a double-edged sword. Therefore, coming forward, Riyadh could become a victim of its own favored weapon of choice: energy politics, if it defies Washington’s demands.

 

 

1. Rosato, Sebastian. “Europe’s Troubles: Power Politics and the State of the European Project.” International Security, 35.4, 2011, 45-86. 

2. Walter Joseph Levy “Issues in International Oil Policy” Foreign affairs (Council on Foreign Relations)

3. Llewelyn Hughes, Austin Long; Is There an Oil Weapon?: Security Implications of Changes in the Structure of the International Oil Market. International Security 2015; 39 (3): 152–189. doi: https://doi.org/10.1162/ISEC_a_00188

4. Gholz, Eugene and Daryl, Press. “Protecting the ‘Prize’: Oil and the U.S. National Interest.” Security Studies, 19.3, 2010, 453-485.

5. Wight, Martin. 1978. Power Politics. New York and London: Continuum/Royal Institute of International Affairs.

 

 

Please note: The above contents only represent the views of the author, and do not necessarily represent the views or positions of Taihe Institute.

 

This article is from the October issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the October issue, please click here:

http://www.taiheinstitute.org/Content/2022/10-31/1615423550.html

 

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