Oil shocks and energy sovereignty

Conflicts shape a world order of oil alliances that threatens to undermine multilateral cooperation.

The Brent crude oil price is soaring at an alarming rate, reaching a high of $110 per barrel, as the Strait of Hormuz remains in a choke. Among the OPEC countries, Venezuela and Iran are jolted by a series of military attacks plotted by the United States.

Iran contributes approximately 3.5 million barrels per day (mbpd) and is an emerging ‘nuclear power’, owing to the enrichment of Uranium in the Bushehr Nuclear Power Plant (BNPP). Venezuela has the largest proven oil reserves in the world. Saudi Arabia (10-11 mbpd) and the UAE (3-4 mbpd), contributing approximately 15-16% of the world’s oil production, are also facing the heat of the escalating regional rifts.

Saudi Arabia’s historic oil security pact (since 1945) with the US, and the presence of the American military base in the Gulf region, have kindled Iran’s wrath in the form of drone and missile attacks on the UAE and Saudi Arabia. The UAE and Saudi Arabia, along with the other Gulf nations, are shifting their stance from neutral to retaliatory against the continuous aggression inflicted upon them by Iran. Energy sovereignty outpaces economic competitiveness.

The OPEC+ alliances, including Russia, one of the largest oil producers (approximately 10.5 mbpd), presently maintain a diplomatic silence regarding the ongoing US-Iran military escalations. However, Russia is sharing strategic intelligence with Tehran, contingent upon US intelligence support to Ukraine. The escalating crude price can benefit Russia through a surge in its oil revenue from major importers such as India, China, and Turkey. Furthermore, this will fuel the sustenance of the ongoing Russia-Ukraine war.

The European Union is one of the largest consumers of oil and other petroleum products. About 60% of its total energy needs are met through imports, with a high dependence on Russia till 2022. Following Russia’s invasion of Ukraine, the EU has reduced this dependence and shifted to other partners like the US for Liquefied Natural Gas (LNG), and Algeria and Norway for both oil and LNG.

The diversification of energy partners away from Russia (a relatively cheaper source) may pose a threat to the industrial competitiveness of the EU. But the European bloc’s strategic plan of REPowerEU, to shift from fossil fuels to build its own capacity in renewable energy sources, can make it a global leader in wind and solar power generation.

The BRICS+ energy bloc

BRICS+ (new members Egypt, Ethiopia, Indonesia, Iran, Saudi Arabia, and the UAE) has emerged as a new energy bloc controlling global oil supply and solar-based electricity generation. This new grouping is also using local currency for oil trade, bypassing dollar-based transactions. The bloc has a competitive advantage in terms of both renewable and fossil fuels. It has the potential to emerge as a new regional power, recontouring the future of the global energy landscape. Furthermore, China and India are shifting from OPEC nations to Russia for imported oil owing to supply uncertainties.

The US has the largest shale oil reserves in the world, and it is one of the largest exporters of natural gas (shale gas). While the world grapples with an energy sustainability crisis, the US has easy access to LNG at an affordable rate. It is also considered a ‘bridge fuel’ in the energy transition process and has lower carbon content compared to crude oil and coal. The price of the US natural gas is declining, reaching below $3.1 per mmBtu. The US’s attacks on Venezuela and Iran are widely seen as strategic moves to expand its control over the global oil reserves and, in turn, reinstate itself as the supreme political and economic power of the world.

The energy sustainability trilemma, involving the three choices of energy security, energy equity (affordability), and environmental sustainability, can be resolved through multilateralism. This will entail cooperation among countries, like the India-Middle East-Europe Economic Corridor (IMEC) and the Energy Charter Treaty, which also facilitates cross-border energy trade.

Just Energy Transition Partnerships (JETPs) encourage partnerships between developed, emerging, and developing economies to facilitate the transition from fossil fuels to cleaner fuels. This spirit of multilateralism is now threatened by the energy sovereignty sentiment across the world. It remains to be seen if the rise of multiple competing energy blocs reshapes multilateralism or fragments the world into distinct pieces. The outcome will also influence efforts towards achieving the net-zero goal by 2050 under the Paris Agreement.

(The writer is faculty, Economics and Public Policy, at IIM Rohtak)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.