After The Crisis
Oil's
Collapse Is a Geopolitical Reset In Disguise
Collapse Is a Geopolitical Reset In Disguise
From Russia to Mexico, U.S. foreign policy makers face new risks
and opportunities.
and opportunities.
By Meghan L. O'Sullivan
Be
prepared to change course.
prepared to change course.
Be prepared to change course. Photographer: USS George H.W.
Bush / Handout/Anadolu Agency/Getty Images
Bush / Handout/Anadolu Agency/Getty Images
Meghan L. O’Sullivan is a Bloomberg Opinion columnist. She
is a professor of international affairs at Harvard’s Kennedy School and is on
the board of directors of the Council on Foreign Relations. She served on the
National Security Council from 2004 to 2007.
is a professor of international affairs at Harvard’s Kennedy School and is on
the board of directors of the Council on Foreign Relations. She served on the
National Security Council from 2004 to 2007.
Read more opinion
Follow @OSullivanMeghan on Twitter
As the coronavirus pandemic continues, Bloomberg Opinion
will be running a series of features by our columnists that consider the
long-term consequences of the crisis. This column is part of a package on how to navigate turmoil in energy markets. For more, see
Liam Denning on how to build a more sustainable U.S. energy system and
Nathaniel Bullard on why developing countries should speed up their energy
transition.
will be running a series of features by our columnists that consider the
long-term consequences of the crisis. This column is part of a package on how to navigate turmoil in energy markets. For more, see
Liam Denning on how to build a more sustainable U.S. energy system and
Nathaniel Bullard on why developing countries should speed up their energy
transition.
The world is on the cusp of a geopolitical reset. The global
pandemic could well undermine international institutions, reinforce nationalism
and spur de-globalization. But far-sighted leadership could also rekindle
cooperation, glimmers of which appeared in the G-20’s offer of debt relief for
some of the world’s poorest countries, a joint plea from more than 200 former
national leaders for a more coordinated pandemic response and an unprecedented
multinational pact to arrest the crash in oil markets.
pandemic could well undermine international institutions, reinforce nationalism
and spur de-globalization. But far-sighted leadership could also rekindle
cooperation, glimmers of which appeared in the G-20’s offer of debt relief for
some of the world’s poorest countries, a joint plea from more than 200 former
national leaders for a more coordinated pandemic response and an unprecedented
multinational pact to arrest the crash in oil markets.
The remarkable effort to address the turmoil in the oil
markets will be critical to oil’s eventual balance — although the past two
weeks have shown that its promised production cuts were too slow and
insufficient in the face of oil demand’s plunge. The challenges and
opportunities that the collapse in the oil market is pushing to the fore are
perhaps just the first taste of Covid-19 induced geopolitical crises that world
leaders and policy makers will need to grapple with in the coming months and
years.
markets will be critical to oil’s eventual balance — although the past two
weeks have shown that its promised production cuts were too slow and
insufficient in the face of oil demand’s plunge. The challenges and
opportunities that the collapse in the oil market is pushing to the fore are
perhaps just the first taste of Covid-19 induced geopolitical crises that world
leaders and policy makers will need to grapple with in the coming months and
years.
As history has shown, a big change in energy markets often
precipitates a big change in geopolitics. For instance, the shift from coal to oil catapulted
Middle Eastern countries to strategic
significance. And the recent technology-driven boom in shale oil elevated
the United States to net oil exporter status, changing its outlook on the
importance of oil in global affairs. We now face a disruption of such
proportions that it, too, will reorder some power relationships.
precipitates a big change in geopolitics. For instance, the shift from coal to oil catapulted
Middle Eastern countries to strategic
significance. And the recent technology-driven boom in shale oil elevated
the United States to net oil exporter status, changing its outlook on the
importance of oil in global affairs. We now face a disruption of such
proportions that it, too, will reorder some power relationships.
Right now, the focus in Washington is on how to save the
U.S. oil industry, much of which is under enormous pressure given the drop in
prices. While this is understandable and necessary, Washington needs to make
room on its list of priorities for a number of strategic shifts that the crisis
has created. For starters, policy makers should consider four challenges and opportunities that are already manifest.
U.S. oil industry, much of which is under enormous pressure given the drop in
prices. While this is understandable and necessary, Washington needs to make
room on its list of priorities for a number of strategic shifts that the crisis
has created. For starters, policy makers should consider four challenges and opportunities that are already manifest.
Prepare for more
fragile, or even failed, states and the risks that can accompany them.
fragile, or even failed, states and the risks that can accompany them.
For dozens of oil producers, the plunge in oil prices is
devastating. No major oil producer can balance its budget at prices below $40; according to the
International Monetary Fund, with the exception of Qatar, every country in
the Middle East requires at least $60, with Algeria at $157 and Iran at a
whopping $390. The average Brent price of oil over the past month has been a
hair above $20.
devastating. No major oil producer can balance its budget at prices below $40; according to the
International Monetary Fund, with the exception of Qatar, every country in
the Middle East requires at least $60, with Algeria at $157 and Iran at a
whopping $390. The average Brent price of oil over the past month has been a
hair above $20.
Of course, fiscal break-even prices are only one factor when
gauging which oil producers are the most vulnerable to deep economic
dislocation and its accompanying social and political turmoil. Those with
(comparatively) more diversified
economies — such as the United Arab Emirates, Mexico and Russia —
are obviously better off. Countries with fixed
exchange rates — like Nigeria and Saudi Arabia — are at a particular
disadvantage, as they need to use their precious foreign exchange reserves to
prop up their currencies. Some countries have the capacity to cut expenditures, and others to borrow. And some have legitimate
political institutions to manage the inevitable hardships as subsidies are
slashed, jobs are lost and capital spending is curtailed.
gauging which oil producers are the most vulnerable to deep economic
dislocation and its accompanying social and political turmoil. Those with
(comparatively) more diversified
economies — such as the United Arab Emirates, Mexico and Russia —
are obviously better off. Countries with fixed
exchange rates — like Nigeria and Saudi Arabia — are at a particular
disadvantage, as they need to use their precious foreign exchange reserves to
prop up their currencies. Some countries have the capacity to cut expenditures, and others to borrow. And some have legitimate
political institutions to manage the inevitable hardships as subsidies are
slashed, jobs are lost and capital spending is curtailed.
But many do not. And, unlike the last price plunge in 2016,
this shock does not come after a period of stable, high oil prices, which
allowed some countries to bolster their finances. Instead, oil prices have been
middling, as America’s surging shale oil production and OPEC+ production cuts
kept them roughly in the $50-$70 range, below many oil exporters’ fiscal
break-even levels.
this shock does not come after a period of stable, high oil prices, which
allowed some countries to bolster their finances. Instead, oil prices have been
middling, as America’s surging shale oil production and OPEC+ production cuts
kept them roughly in the $50-$70 range, below many oil exporters’ fiscal
break-even levels.
Iraq, Oman, Algeria, Nigeria, Ecuador, Angola, Suriname
— not to mention two countries already on the brink, Iran and Venezuela
— are particularly vulnerable. They
may not all fail in the sense of state collapse, but many could cease to
meet their public sector payrolls, never mind expenditures related to health
care, education and other services, including security.
— not to mention two countries already on the brink, Iran and Venezuela
— are particularly vulnerable. They
may not all fail in the sense of state collapse, but many could cease to
meet their public sector payrolls, never mind expenditures related to health
care, education and other services, including security.
The mere prospect of many countries unable to fund their
security budgets should sound alarm bells in the United States and beyond. It
adds urgency to a question that national security professionals, foreign policy
makers and politicians have grappled with since 9/11: How to keep ungoverned
territories from becoming safe havens
for terrorist groups or drug cartels looking to target the West or
undermine its security in other ways. Of particular concern to U.S. policy
makers should be Iraq, Nigeria and Mexico. Each faces its own looming
crisis, with potentially profound implications for U.S. interests.
security budgets should sound alarm bells in the United States and beyond. It
adds urgency to a question that national security professionals, foreign policy
makers and politicians have grappled with since 9/11: How to keep ungoverned
territories from becoming safe havens
for terrorist groups or drug cartels looking to target the West or
undermine its security in other ways. Of particular concern to U.S. policy
makers should be Iraq, Nigeria and Mexico. Each faces its own looming
crisis, with potentially profound implications for U.S. interests.
In Iraq, a
caretaker government confronts deep fiscal travails: Its oil revenues — which
make up 90% of budgetary income — plunged by 46% for March, even before the
full impact of the coronavirus on oil was apparent. This fiscal collapse has
dire implications for the country’s struggle to stave off ISIS, for
Iraq’s ability to stand up to interference by its neighbors and for its efforts
to meet the demands of its young and restive population.
caretaker government confronts deep fiscal travails: Its oil revenues — which
make up 90% of budgetary income — plunged by 46% for March, even before the
full impact of the coronavirus on oil was apparent. This fiscal collapse has
dire implications for the country’s struggle to stave off ISIS, for
Iraq’s ability to stand up to interference by its neighbors and for its efforts
to meet the demands of its young and restive population.
Nigeria’s economy
is likewise beleaguered, having just begun to climb out of a recession before
the imposition of strict pandemic containment measures. Signs of social
discontent are on the rise, and President Muhammadu Buhari — a former
military man — could resort to the army to maintain law and order. That would
undermine the legitimacy and effectiveness of Nigeria’s battle against an Islamist
insurgency in the northeast of the country, with ripple effects throughout
an already vulnerable region.
is likewise beleaguered, having just begun to climb out of a recession before
the imposition of strict pandemic containment measures. Signs of social
discontent are on the rise, and President Muhammadu Buhari — a former
military man — could resort to the army to maintain law and order. That would
undermine the legitimacy and effectiveness of Nigeria’s battle against an Islamist
insurgency in the northeast of the country, with ripple effects throughout
an already vulnerable region.
With its diversified economy, a hedge on its oil for 2020
and relatively developed institutions, Mexico
is much better positioned to manage the turmoil in energy markets. But
President Andres Manuel Lopez Obrador’s apparent unwillingness to grasp the severity
of the pandemic should be cause for concern. Even as other countries deliver
eye-popping relief to the newly unemployed, Lopez Obrador has barely budged
from earlier pledges of austerity or moved to revisit other elements of his
economic plans. The federal government is struggling to wrest control of parts
of the country from drug cartels, and to meet U.S. demands to contain
Central American migrants heading north. Should Mexico be forced to cut
back spending on security forces as seems highly likely, both those
problems could metastasize.
and relatively developed institutions, Mexico
is much better positioned to manage the turmoil in energy markets. But
President Andres Manuel Lopez Obrador’s apparent unwillingness to grasp the severity
of the pandemic should be cause for concern. Even as other countries deliver
eye-popping relief to the newly unemployed, Lopez Obrador has barely budged
from earlier pledges of austerity or moved to revisit other elements of his
economic plans. The federal government is struggling to wrest control of parts
of the country from drug cartels, and to meet U.S. demands to contain
Central American migrants heading north. Should Mexico be forced to cut
back spending on security forces as seems highly likely, both those
problems could metastasize.
How might the United
States and its partners prepare for more turmoil in these countries, and in
ungoverned territories, particularly in the Sahel or the Middle East where
extremist groups already have toeholds? One answer is obviously the need to
maintain and increase aid and humanitarian assistance to the many
countries that will face existential crises, either from the oil plunge, the
coronavirus, or both. Another answer, strangely enough, can be found in Syria. Far from being the “forever
war” that President Donald Trump called it, the small, behind-the-scenes
contingent of U.S. troops supporting a much larger group of indigenous forces
against extremist fighters is the sort of arrangement that the United
States — ideally with others — should replicate in countries that ask for help.
Faced with the demands and fears of their own citizens, politicians in North
America, Europe and elsewhere may struggle to justify security and other
support for countries whose institutions wobble or collapse under the combined
weight of low oil prices and the coronavirus. But being prepared to build more
limited military partnerships — and, importantly, to explain to their citizens
why such arrangements aren’t “forever wars” — will be part of managing the
foreign policy fallout of this moment.
States and its partners prepare for more turmoil in these countries, and in
ungoverned territories, particularly in the Sahel or the Middle East where
extremist groups already have toeholds? One answer is obviously the need to
maintain and increase aid and humanitarian assistance to the many
countries that will face existential crises, either from the oil plunge, the
coronavirus, or both. Another answer, strangely enough, can be found in Syria. Far from being the “forever
war” that President Donald Trump called it, the small, behind-the-scenes
contingent of U.S. troops supporting a much larger group of indigenous forces
against extremist fighters is the sort of arrangement that the United
States — ideally with others — should replicate in countries that ask for help.
Faced with the demands and fears of their own citizens, politicians in North
America, Europe and elsewhere may struggle to justify security and other
support for countries whose institutions wobble or collapse under the combined
weight of low oil prices and the coronavirus. But being prepared to build more
limited military partnerships — and, importantly, to explain to their citizens
why such arrangements aren’t “forever wars” — will be part of managing the
foreign policy fallout of this moment.
Double-down on contingency planning and red-teaming for Iran
and Venezuela.
and Venezuela.
Both Iran and
Venezuela were careening before the coronavirus materialized. Under severe
U.S. sanctions, oil exports — a lifeline for both countries — had been
dramatically curtailed before the pandemic and the oil price collapse. The
impact of cratering oil prices will therefore be far less than in the past, but
each will still suffer as foreign exchange dwindles further, constraining
imports even more.
Venezuela were careening before the coronavirus materialized. Under severe
U.S. sanctions, oil exports — a lifeline for both countries — had been
dramatically curtailed before the pandemic and the oil price collapse. The
impact of cratering oil prices will therefore be far less than in the past, but
each will still suffer as foreign exchange dwindles further, constraining
imports even more.
Many in the Trump administration may hope that this
confluence of historical factors leads to the downfall of the Bolivarian
revolution in Venezuela and the Islamic revolution in Iran. Yet is the United
States prepared if either scenario unfolds?
confluence of historical factors leads to the downfall of the Bolivarian
revolution in Venezuela and the Islamic revolution in Iran. Yet is the United
States prepared if either scenario unfolds?
The fall of Venezuela’s
Nicolas Maduro may lead not to the transitional government many have hoped for,
but to complete state collapse and an epic humanitarian and security disaster.
Alternatively, if the country is hit hard by Covid-19, pressures for political
accommodation between Venezuela’s opposition and the government could extend
Maduro’s tenure. Iran’s government
is much more entrenched, and it is hard for outsiders to accurately assess
what’s happening there right now. If the regime is under unprecedented pressure,
the most likely outcome is not for a democratic alternative to emerge, but for
the Islamic Revolutionary Guard Corps to assume more power, heightening
U.S.-Iran tensions and the potential for hot conflict.
Nicolas Maduro may lead not to the transitional government many have hoped for,
but to complete state collapse and an epic humanitarian and security disaster.
Alternatively, if the country is hit hard by Covid-19, pressures for political
accommodation between Venezuela’s opposition and the government could extend
Maduro’s tenure. Iran’s government
is much more entrenched, and it is hard for outsiders to accurately assess
what’s happening there right now. If the regime is under unprecedented pressure,
the most likely outcome is not for a democratic alternative to emerge, but for
the Islamic Revolutionary Guard Corps to assume more power, heightening
U.S.-Iran tensions and the potential for hot conflict.
Now would be a good time for the U.S. not only to step up its contingency planning for such
outcomes, but also to consider whether changes to American policy toward
either country would better advance its interests and mitigate human suffering.
In particular, the United States should reconsider its earlier decision not to
establish some version of an Oil for Food program for Venezuela. Such a program
could save Venezuelan lives, stem the tide of refugees that risks destabilizing
the whole region and bolster the political opposition; in the face of a global
pandemic, these benefits should now outweigh any concerns policy makers may
have had about prolonging the life of the Maduro regime.
outcomes, but also to consider whether changes to American policy toward
either country would better advance its interests and mitigate human suffering.
In particular, the United States should reconsider its earlier decision not to
establish some version of an Oil for Food program for Venezuela. Such a program
could save Venezuelan lives, stem the tide of refugees that risks destabilizing
the whole region and bolster the political opposition; in the face of a global
pandemic, these benefits should now outweigh any concerns policy makers may
have had about prolonging the life of the Maduro regime.
Defuse a looming U.S. crisis with Saudi Arabia.
Saudi Arabia and
other OPEC+ members had multiple motives for agreeing on April 12 to curb oil
production. In Saudi Arabia’s case, however, among those reasons was a sharp
increase in hostility from members of the U.S. Congress who in the past
appeared to appreciate the multifaceted relationship between Riyadh and Washington.
Once willing to speak in favor of the U.S.-Saudi partnership, these members
suddenly revealed that they were willing to upend economic, military, and
diplomatic ties if Saudi Arabia did not curb its production to arrest the
free fall of oil prices (and protect the American oil industry).
other OPEC+ members had multiple motives for agreeing on April 12 to curb oil
production. In Saudi Arabia’s case, however, among those reasons was a sharp
increase in hostility from members of the U.S. Congress who in the past
appeared to appreciate the multifaceted relationship between Riyadh and Washington.
Once willing to speak in favor of the U.S.-Saudi partnership, these members
suddenly revealed that they were willing to upend economic, military, and
diplomatic ties if Saudi Arabia did not curb its production to arrest the
free fall of oil prices (and protect the American oil industry).
Such threats no doubt gave President Trump leverage when
pressuring Saudi leaders to agree to a deep cut. But they also exposed the
fragility in the bilateral relationship. If oil prices continue to fall,
members of Congress may well try to punish Riyadh for a situation largely not
of its own making. It would be a painful pressure point on the kingdom at a
time when neither the United States nor the region can afford any greater
destabilization. To avert that possibility, the administration should work
closely with key members of Congress. It should not cede management of the
bilateral relationship to the legislative branch.
pressuring Saudi leaders to agree to a deep cut. But they also exposed the
fragility in the bilateral relationship. If oil prices continue to fall,
members of Congress may well try to punish Riyadh for a situation largely not
of its own making. It would be a painful pressure point on the kingdom at a
time when neither the United States nor the region can afford any greater
destabilization. To avert that possibility, the administration should work
closely with key members of Congress. It should not cede management of the
bilateral relationship to the legislative branch.
Expand contacts over managing the oil market into more
lasting areas of détente.
lasting areas of détente.
Recent efforts to pull the global oil market back from the
brink exposed some new common interests and triggered intense contacts between
leaders. Might this prompt greater cooperation in otherwise fraught
relationships? As President Trump’s about-face on the value of OPEC
demonstrates, now is a time for rethinking old orthodoxies and finding new ways
to approach problems.
brink exposed some new common interests and triggered intense contacts between
leaders. Might this prompt greater cooperation in otherwise fraught
relationships? As President Trump’s about-face on the value of OPEC
demonstrates, now is a time for rethinking old orthodoxies and finding new ways
to approach problems.
Despite Trump’s insistence that the United States needs and
wants a better relationship with Russia,
this dysfunctional dyad so far has been impervious to recalibration. Moscow and
Washington are unlikely to come to any meaningful détente, given President
Putin’s need to demonize the United States and the certainty that Russia is
in for hard economic times. Putin has repeatedly tried to compensate for
economic bad news by asserting Russia more aggressively on the world stage. He
could well do the same again.
wants a better relationship with Russia,
this dysfunctional dyad so far has been impervious to recalibration. Moscow and
Washington are unlikely to come to any meaningful détente, given President
Putin’s need to demonize the United States and the certainty that Russia is
in for hard economic times. Putin has repeatedly tried to compensate for
economic bad news by asserting Russia more aggressively on the world stage. He
could well do the same again.
Yet a small opening exists to professionalize a segment of
bilateral U.S.-Russia ties. Russia has long been interested in pulling the United
States into coordinating the global oil market. Although the United States does
not need to join OPEC+ and its pledges to mandate production cuts, having
regular exchanges about global energy trends could create a niche for
constructive discussions between Russian and U.S. officials. It is not crazy to
think that a dialogue around common energy interests could evolve into a more
meaningful conversation about how to deal with Venezuela’s collapse, for
instance.
bilateral U.S.-Russia ties. Russia has long been interested in pulling the United
States into coordinating the global oil market. Although the United States does
not need to join OPEC+ and its pledges to mandate production cuts, having
regular exchanges about global energy trends could create a niche for
constructive discussions between Russian and U.S. officials. It is not crazy to
think that a dialogue around common energy interests could evolve into a more
meaningful conversation about how to deal with Venezuela’s collapse, for
instance.
Similarly, although China
was not a central player in trying to stem the oil market collapse, the United
States and others should bring Chinese officials into regular consultations on
the topic. As the world’s largest oil importer and its sixth largest producer,
China’s interests are mixed. But as the world’s second largest economy, China
may have its own tools to influence global supply and demand. Energy (and
climate) are areas in which the United States and China have common interests,
and where they have had productive exchanges, even during periods of tension.
Again, it is not crazy to think that such dialogues, if intensified, could be a
net positive in a critical but rapidly deteriorating bilateral relationship.
was not a central player in trying to stem the oil market collapse, the United
States and others should bring Chinese officials into regular consultations on
the topic. As the world’s largest oil importer and its sixth largest producer,
China’s interests are mixed. But as the world’s second largest economy, China
may have its own tools to influence global supply and demand. Energy (and
climate) are areas in which the United States and China have common interests,
and where they have had productive exchanges, even during periods of tension.
Again, it is not crazy to think that such dialogues, if intensified, could be a
net positive in a critical but rapidly deteriorating bilateral relationship.
Finally, by giving Mexico, Saudi Arabia and Russia a
face-saving way to paper over Mexico’s partial compliance with the April 12
production cut agreement, Trump should have secured some goodwill with Mexico’s
president. That could come in handy as both countries, with their intertwined
economies, cooperate to smooth the transition to normalcy, whenever that comes.
face-saving way to paper over Mexico’s partial compliance with the April 12
production cut agreement, Trump should have secured some goodwill with Mexico’s
president. That could come in handy as both countries, with their intertwined
economies, cooperate to smooth the transition to normalcy, whenever that comes.
Foreign policy makers and leading thinkers do need to
consider how the global order will change in response to the coronavirus. As John Ikenberry pointed out
elsewhere, history suggests that initial moves toward isolation could be
followed by global efforts to re-create needed institutions. But a U.S.
failure to address the more immediate challenges stemming from the Covid-19 oil
market collapse will not bode well for any larger effort to remake the world
order.
consider how the global order will change in response to the coronavirus. As John Ikenberry pointed out
elsewhere, history suggests that initial moves toward isolation could be
followed by global efforts to re-create needed institutions. But a U.S.
failure to address the more immediate challenges stemming from the Covid-19 oil
market collapse will not bode well for any larger effort to remake the world
order.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Meghan L. O'Sullivan at Meghan_OSullivan@hks.harvard.edu
To contact the editor responsible for this story:
James Gibney at jgibney5@bloomberg.net
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