How the Energy World of Tomorrow Reshapes Geopolitics

How the Energy World of Tomorrow Reshapes Geopolitics
Michael Ciaglo/Houston Chronicle via AP
How the Energy World of Tomorrow Reshapes Geopolitics
Michael Ciaglo/Houston Chronicle via AP
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To understand geopolitics we need to understand power, which in turn derives from the perception of national wealth. The way nation-states use their wealth to defend their interests helps to shape our perception of their place and their role in the world. Soil resources are among the most important elements of wealth. But it is the human being who evaluates those elements -- as such, the human resource is superior to them.

Hydrocarbons played a vital role in World War II, and the use of energy has evolved in the decades since. In order to understand the way the energy sector is perceived today, as well as the geopolitical consequences of this perception, we must understand how World War II redefined the world itself. The strategies developed by the two opposing world powers during the Cold War, inspired by the lessons of the Second World War, were based on access to energy resources and the use thereof. This is no longer the case today, although energy security remains an important part of shaping a national strategy. What has changed is the way we perceive reality today. We’re increasingly individualistic, which grows our importance as human beings and communities in defining the role of the nation-state in an increasingly “not-so-global” world.  

Energy nodes: redefining the world

The end of World War II also marked the end of longstanding European empires. Among the winners, the United States was the most powerful. Their economy was the least affected by the global conflagration. From the military point of view, the United States remained the only naval force of global significance. If before the war America’s geographical position had required it to invest in the naval capabilities needed to secure its borders, after the war, the United States made of this need a strategic advantage. The United States understood that in order to secure its borders, it would now have to secure the world's oceans.

In fact, Washington has since taken control of global trade networks. The security element of that control was the global presence of the U.S. fleet, and this was reinforced by the commercial policies derived from the Bretton Woods agreements that founded a new economic system. During the Cold War, if a country wanted to benefit from the free-trade system, it had to cooperate with the United States on a security level. Such collaboration underwrote the foundation of NATO and that alliance's international partnership networks. Thus, Bretton Woods was not just about the economy. It was more than anything about security. The United States used its position to anchor lasting alliances for a war with the Soviet Union -- a war that seemed likely to occur.

The economic system established at Bretton Woods not only made it possible for the West to win the Cold War, but it also supported the development of NATO. Because prosperity was created through the free-trade system, that system is what symbolically won the war. Symbols matter: They usually live longer than they are programmed to live in policy papers. Thus, the victorious system of free trade constituted the basis for the globalization that ensued. Through trade networks that established deep links among communities, the risk of renewed global conflict would be reduced. This was the theory on which development models from the early 1990s were created.

The commercial network during the Cold War was supported by an energy strategy that aimed to ease access to global energy resources for all U.S. allies. They had to be able to purchase energy relatively cheap -- and especially oil, the strategic raw material for the global production of goods and services. Before World War II, Western European countries got their energy via long-established colonial routes. After the war, and especially after the Suez Crisis of 1956, when America refused to help the British and French to maintain their control over a key colonial trade route, Western Europe became completely dependent on the United States. A new supply chain had been established by expanding the network of partnerships of the North Atlantic alliance. The allies used this network to try to block Soviet influence even as they expanded their own. 

With this, energy consumption increased. Throughout the Cold War, the relevant global producers worldwide were the Soviet Union -- whose exploitation of its resources was limited by difficult geography -- and the Middle East, which became the main source of oil for U.S.-allied countries. The United States, a world-class producer during World War II, became a net importer of hydrocarbons in 1973. The pressure imposed by the country’s energy needs led to the establishment of strategic relations with states such as Saudi Arabia or Algeria, even though these nations did not share the democratic values and principles supported by Washington. Other Western countries followed suit.

Relaxation and optimism: energy security in transition

After the end of the Cold War, optimism for a better world grew. Free trade grew into something more than just a symbol that won the war -- it became the preferred system to increase national wealth. It was facilitated by digitalization, which was supported, in turn, by consumers' desire to transcend borders, looking for diminishing cultural differences. We all had the feeling, in the 1990s, that things could only get better. This feeling held despite the difficulties Russia and other states formerly in the Soviet orbit had in transitioning toward the new system. The transformative process was animated by faith.

However, hoping for the better didn’t improve the map and the infrastructure of oil supply -- this was not simplified. On the contrary, for both Europe and America, it became even more complex. In the early 2000s, the list of top exporters to the United States was made up of Canada, Mexico, Saudi Arabia, and Venezuela. Europe's dependence on Russia increased after the Cold War, even though for Western European countries, sources of supply diversified and included countries in North Africa or the Middle East. Hundreds of contracts had to be closed daily, both on the spot and secondary markets. Increasingly complex realities caused new commercial risks to proliferate.

In 2001, the United States was the first country to wake up from the sweet dream of globalization. That was the moment when it became obvious that the end of the Cold War produced new risks. These risks had to be taken into account alongside those already present in commercial contracts and transactions on the global energy market. Large corporations, both private and state-owned, have had to manage more or less by themselves the political and security risks associated with the energy supply chain, becoming active players alongside states in the global energy market. This, together with the reality of an increasingly complex world characterized by accelerated economic development and limited resources, has helped drive a trend of increasing differences in wealth among nation-states and among social classes. It has also meant increasing energy demand, which translates to an increase in the oil price.

At the same time, the founding members of the Bretton Woods system understood that while that system still existed, its operating conditions had changed. Under the new reality of the 2000s, states lost much of their control over the evolution of the oil price. The United States and American businesses realized that without U.S. coordination of economic flows, which was impossible in the new context, they might lose their competitive advantage in the energy market.

The financial crisis that began in 2007 further exposed the problems of an unmanaged economic system. The rules seemed too few, the dependencies too intricate. The European Union, due to its enlargement toward the east, had begun to understand the problem of energy dependence on Russia. At the same time, China's emerging economy was becoming a major energy consumer. Russia, after significant investments in the development of the energy sector, was growing in importance as a producer, both regarding the European market, but also regarding the potential for cooperation with China.

The rules that governed economic transactions were the same as those established at Bretton Woods, but the institutions and alliances established at that time and in the 1990s were becoming outdated. Old partnerships such as NATO no longer restrained new forms of cooperation. A collaboration based on economic interests was emerging between Russia and Germany. EU member states in Europe’s east prioritized regional dynamics, while those in the west were occupied with internal socio-economic issues and deprioritized the EU integration process. In the Middle East, Turkey has tried to grow into a regional power, although it risks domestic instability. The United States has become increasingly concerned with domestic issues, even if it does remain globally active.

Resettlement and disarray

The world is changing again. If in 2001 business realized that the United States does not control the world anymore, since 2007 it has been apparent that American society has begun to change. The same thing has happened in Europe. European society has slowly started responding to the negative effects of globalization, similar to the Americans. Differing geographical and social contexts mean that these responses have differing influences on the energy sector.

In America...

The price of oil has increased from approximately $15 per barrel in 1989, to $20 in 2000, to $70 in 2007, and $100 in 2011. Invoices for just about everything else have mirrored these increases. When the cost of living goes up because the price of energy is rising and you have no opportunity to increase your income, you think about lowering your expenses. Moreover, when you see the rising price of oil and you hear that pollution is slowly killing the planet, you think it might be better to consume less energy. You might consider buying more energy-efficient products. As consumers make these demands, producers adapt their offers.

Of course, big changes do not usually happen from one day to the next. But when an adaptation must be made suddenly, as in the context of an economic crisis, the restructuring can produce energy efficiency. Of course, government policies also help -- especially in countries where the safety net and social policies are important. This is not the case in the United States, where dynamism is the rule for adaptation, but it is the case in European states. Consumer habits do not modify radically except under conditions that create a favorable environment for change, usually generated by economic shocks, which require less time to impact society. These changes, while important, usually remain marginal and become an inspiration for future innovations. “Marginal” in a market of 2 million consumers can mean that a niche of several thousand people came into being. But in a market of more than 300 million consumers, a marginal change influences production worldwide. Changing consumption patterns at the individual level in the United States have produced just such a global change, to the degree of constituting a new starting point.

More important is the way in which American society reacted to the challenges brought about by the financial crisis. For the first time after the end of the Cold War, society began to see America’s global involvement as problematic for their country’s stability. Among the sources of U.S. socio-economic problems, as perceived by the population, the political class’s lack of concern for the needs of “ordinary citizens” became prominent. Increasingly, due to this perception, American foreign policy has begun to be seen as favoring the rich and powerful, while the "others," the vast majority of the electorate, see themselves to be contributors to the state’s policies, rather than beneficiaries of them.

The U.S. business environment in the energy sector was among the first to react to the new international context, which was beginning to emerge as early as 2001. Due to price pressures and increased security risk for the development of business in the international environment (for oil companies in particular), energy companies returned to domestic investments favoring new technologies. Technological progress in the energy field has meant an increase in shale oil production. From 6.8 million barrels per day in 2006, to 13 million barrels per day in 2015, shale oil production is expected to turn America from an importer to a net exporter by 2020. This reality, together with the elements that have redefined consumption patterns in the world’s most important energy market, creates a new basis for discussions on energy security.

In Europe...

The effects of the financial crisis have spread more slowly on the European continent. Nonetheless, they continue to produce long-term consequences. Socio-economic problems have returned nationalism to prominence. The feelings of the population toward its traditional political class, largely perceived as more or less damaged and corrupted, are similar to those seen in American society, but their effect is doubled. They not only influence the internal political life of member states, but also the operation and perception of the European Union. Brexit is just one of the effects of societal dissatisfaction, while EU integration serves as a mirror to it.

The Energy Union started as a solution to Europe’s energy dependence on Russia -- and more generally, as a response to the effects of long-term socio-economic problems. The project is currently suspended somewhere between the economic mathematics and political discussions. Energy infrastructure projects are not necessarily the result of political will at the EU level, but serve the national interests of member states. The classic example, in this sense, is the Nord Stream II project. Socio-political problems of different member states supported by different economic realities have resulted in the formation at the EU level of regional interest groups: the states of Eastern Europe vs those of Western Europe, founding states vs newcomer states, so-called core states vs peripheral states, and so on.

In addition to these issues, the rise in the price of oil and the emergence of the politics of social responsibility and environmental protection, but also the increasing need for the population to grow its savings and rely less on the social contract, have fostered a similar attitude toward individual energy consumption. Like the American population, Europeans want to consume and pay less.

Shaping global disorder, from the market to the sovereign interest

In order to establish effective strategies in the new global context, we must understand the new attributes of the population. That’s what defines the market. So who is the population? And what does it look like? Demographics must be taken into account in order to understand consumption patterns. One behaves in a certain way at 20 years old, otherwise at 40 and differently at 70. If the majority of a state’s population is old, we can make a general geopolitical comment on the ways in which it can develop and on its specific security needs, which derive from the national interest but also depend on the demographic context. With an eye on these variables among others, we can anticipate how a state will position itself in the market of consumer goods, services, and energy.

In the case of the two traditional energy consumers -- the United States and Europe -- demographics and other social factors indicate a natural decrease of energy consumption for the next 15 years. The older baby boomers started to retire in 2007. Their disappearance from the labor market will naturally yield a drop in energy consumption. Sure, the United States still has a healthy demography with a solid foundation, but consumption habits differ among generations. And due to the consumption habits of the children and grandchildren of baby boomers, trained in the idea of efficiency, the mentioned decrease becomes possible.

In Europe, the West has already begun to face a demographic problem. Its effects may be observed in the socio-political sphere, especially in national immigration policies. In the West, the refugee crisis of 2015 added pressure to a demographic environment that was already troubled. Eastern Europe, though with a better demographic, is not far behind the West. The number of retirees has grown rapidly since 2013 in Germany, Italy, Greece, and France. Eastern Europe’s pensions are under pressure, and a large proportion of the young population is working outside the region. The causes are thus different from region to region, but market contractions are expected just the same. In the long term, the generational preferences fueled by technological progress will diminish the demand from traditional consumers and increase the need for innovation.

New risks on a new map

All of these factors lead to a redrawing of the global map -- both of its energy resources, and its energy security needs. Energy producers will continue to seek new markets -- less in an effort to reshape retail markets, and more in order to support their development models. They will target Asia, and especially China, but that region’s consumption capabilities are limited. In a period of anemic economic growth, countries such as Russia and producers in the Middle East will go through periods of economic instability. These can end by reforming the national development models, but can also lead to internal or international conflict.

The United States started to visibly withdraw from the role of global manager, including at the political level, as early as 2016. The protagonists of the 2016 presidential campaign were Donald Trump -- who proposed (and later put into practice) the renegotiation of all U.S. alliances and agreements -- and Hillary Clinton, who opposed the conclusion of all free trade agreements negotiated over the past 25 years, including those she had personally helped to negotiate. Moreover, the United States in 2015 reduced the presence of armed forces in operating theaters to values that had not been seen since before 1941. With domestic production on the rise, the United States no longer has the same interest in securing global energy-supply routes.

While the U.S. interest has shrunk, the entire world is dependent on the system imagined, managed, and protected by the United States after the end of World War II at Bretton Woods. Its withdrawal means that the world’s energy exporters will have to find markets and secure their supplies, while importers will have to find ways to secure and streamline their energy sources.

The new context reshapes some of the key issues of global geopolitics. With the withdrawal of the United States from the Persian Gulf (unlikely, in full, in the very near future), conflict could escalate between Saudi Arabia and Iran. Both states have economic problems, and both are facing complicated processes of societal reform. Both have oil reserves, as well as complicated relationships with the United States. At the regional level, such a conflict would attract the participation of Turkey, a state that is trying to restore its role of regional power, a knot between Europe and Asia.

If tensions escalate in the Middle East, it will affect not only the energy markets, but also global stability. The United States will remain involved where they have an interest in doing so, trying to minimize their exposure to risk. Given the possible scenarios in the Middle East, America will act as slowly as possible - and the other powers (especially Russia, but also Turkey) will try to prevent a complete U.S. exit.

Due to the existing dependence between the United States and European states, one of Washington’s geopolitical imperatives is to prevent conflict on the continent. It is possible that the aggressiveness of Russia, weakened by social problems and with an economy dependent on the price of oil, will continue. In order to discourage Russian aggression, the United States supports the establishment of a regional alliance in Eastern Europe. But a socio-political crisis in Russia would spread instability not only in its European neighborhood, but also in Central Asia. This scenario would attract the involvement of the United States, Europe, and Asia.

In a twist of fate, America’s calculated withdrawal, which is predicated on the fact that it can ensure the consumption of its own energy production, can be to its detriment in the long term. The multipolar world that emerged after 2007 does not empower the "regional players" by default -- they don’t become simple network administrators. Nor does it add any new attributes that enhance their wealth and make them stronger or more responsible. Further, the withdrawal of America does not mean a dilution of its wealth or power. However, the current resettlement will produce consequences that involve more complex calculations for risk managers in the private space and for the operationalization of national strategies.

2019: a new beginning

2019 announced a world without the United States as "global policeman" -- but Washington will continue to be the greatest global power. Geography has become more fluid. The energy map no longer simply includes hydrocarbon producers and consumers. Innovation has modified pretty much everything relating to the energy supply chain, from the extraction process to the build-up of infrastructure and consumption. Through innovation, the human resource has become more valuable than any of the world’s natural resources -- human intelligence and creativity determine the development of new models for the energy sector.

However, ideological divisions and geographical differences persist and will deepen. Sovereignty, supported by nationalism, is increasing, not decreasing. Over the long term, the nation-state will likely evolve, reshaped by social perceptions of politics and by the rise of individualism. It is likely that new states will take shape and others will expand their area of control.

Physical borders will continue to be diluted by digitalization, while infrastructure, by connecting emerging social networks, will become part of physical geography. However, connectivity also creates claustrophobia and new fears, determined by the new challenges of society. As such, discussions about how human communities can reduce their dependencies will continue. And this will influence the way the energy sector in the world of tomorrow will develop, and the new types of geopolitical players that will emerge.

A version of this article was first published, in Romanian, in Energia, a policy book by Club Romania. Antonia Colibasanu is a senior geopolitical analyst and the Chief Operating Officer of Geopolitical Futures. She serves as an associate professor at the Regional Department of Defense Resources Management Studies located in Brasov, Romania, and has served as Honorary Adviser to Romania's energy minister. The views expressed are the author's own.



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