The writer chairs the Policy Institute at King’s College London
Despite plentiful supplies of fuel and low prices, energy security is a global concern. The fear 30 or 40 years ago was that supplies would be cut off by Opec or Russia, but that has changed. Now, the focus is on the impact of low prices on social and political stability, China’s growing dependence on imports and the longer-term threat of climate change.
The effect of low prices on stability is already being felt across the Middle East. The oil price is now just over half that of six years ago — it has fallen as much as 20 per cent since the turn of the year, with the latest downward pressure linked to the economic impact of the coronavirus in China.
The loss of revenue for oil-producing countries comes on top of other problems in the region such as rising populations and high unemployment, low productivity, weak governments and, in specific cases such as Iran, the impact of sanctions.
Low prices could further discourage investment in new oil and gas supplies. The world is not about to stop using oil, and more development will be needed to replace declining output from existing fields.
Facing reduced income, many state oil companies — not least in Opec countries — are likely to limit investment. The private sector, including the major international companies, will also experience a fall in income but still face pressure from shareholders to maintain dividends. An easy option then is to postpone investment, particularly in projects that require higher prices, such as discoveries in ultra-deep water.
Private companies may also avoid areas where the risks are high and physical security cannot be guaranteed. Sanctions keep most international companies out of Iran, for instance, while recent events in Iraq have led some companies to step back from plans for investment.
The net result of all these factors is that future production could be lower than the upward trend of demand being driven by population numbers and economic growth in emerging economies.
The second challenge comes from China and its dependence on imports, which for oil averaged 10.1m barrels a day last year. In normal times Chinese imports are not a problem because there is no shortage of supply. But security is about what happens when times are not normal — and the sudden drop in demand linked to the coronavirus epidemic is showing how quickly the effects of a change in China are felt globally.
For Beijing, energy security is now a real concern and it was noticeable that in the midst of events in the Middle East after the killing last month of Iran’s top military commander Qassem Soleimani, China offered assistance to Iraq.
Any disruption to flows of oil through the Strait of Hormuz would hurt China far more than any western economy because of its heavy dependence on Gulf states for crude. Beijing’s response to any major disruption is uncertain. It could intervene to maintain stability in areas such as the Middle East — or it could use its reach and financial muscle to buy all the supplies it needs on the world market, leaving other importers facing shortages and escalating costs.
Beyond those immediate concerns over China and the low price of oil, there is the longer-term challenge of climate change. A worldwide deal capable of securing the reduction in emissions needed to keep global warming below 2 degrees, or the more ambitious 1.5, is hardly within reach. As the last major climate summit in Madrid demonstrated, there is simply no agreement between the main players.
In the absence of any consensus, climate instability poses serious risks — large-scale physical damage resulting from extreme weather, disputes between countries that are pursuing different policies, and forced migration as increasing temperatures make whole areas uninhabitable. Regions that produce oil and gas and rely on the income from their exports are also vulnerable to the impact of a changing climate. In north Africa, for example, desertification and the inability to produce food could generate a new exodus of refugees trying to cross the Mediterranean.
Energy is back on the agenda of this week’s international Munich Security Conference in Germany. None of the challenges set out above match the traditional security agenda. They cannot be dealt with by theories of deterrence or the threat or use of military force. They redefine the meaning of security. In each case, the best answers lie in international agreement leading to collective precautionary action. But international agreement is the scarcest commodity of all.
