The Influence of Politics on Energy: A Crisis of Market Relations
© Valdai Discussion Club
FOn July 2, the first day of the international conference Global Energy and International Political Risks co-hosted by the Valdai Discussion Club and Azerbaijans Center of Analysis of International Relations, experts discussed the impact of global political shifts on the world energy sector. The event featured Russian Minister of Energy Alexander Novak and his Azerbaijani counterpart, Parviz Shahbazov, who took part in the discussions.
The influence of politics on energy is quite multifaceted and nothing new. Recently, however, a new turn has been outlined during the discussion about the presented report, Political Risks in Global Energy: From Resource Nationalism to Molecules of Freedom and Climate Weapons. The report states that most recently, the generation of political risks has been attributed to hydrocarbon exporters and owners of major oil and gas reserves. But now everything has changed because of shale oil, and then the green revolution. They gave hope to the OECD countries that they would be able to get rid of the need to buy hydrocarbons from the Middle East and the former Soviet Union. The United States became the worlds largest producer of both gas and oil, and soon its exporter. A rightful exporter appeared, ready to share a valuable energy resource with its political partners. But they had to pay for the service of diversified supplies. In order to discredit their competitors and convince the world to buy their energy resources, the US began to use political tools in the competitive market.
The green revolution in general must save Europe, first of all, from oil and gas. True, renewable energy remains an expensive and unstable source of energy, and the issue of replacing hydrocarbons in transport, the public sector, chemistry, and a number of other industries has not yet been completely resolved. The share of hydrocarbons in the EU energy balance is still slightly less than 75%. It is very difficult for green energy to defeat traditional energy producers in a free and competitive market thus, the story of the need to combat global warming comes into play.
If earlier, hydrocarbon exporters were accused of using money from exports to consolidate authoritarian rule, now blame is based on the fact that they produce goods that contribute to an increase in the average temperature on the planet. It is possible that even an international climate tribunal will soon appear.
Participants in the conference discussed the example of Nord Stream-2, the construction of which has been openly assaulted via political instruments. Although this gas pipeline complies with international law, and even European goal-setting documents in the field of energy, it has led to a great deal of US pressure on countries that consider it a commercial project. This is primarily true of Germany, which faces the risk of isolation in the Western world. Transatlantic relations have been called into question and only because Germany perceived the gas pipeline as part of the gas business. It turns out that fair competition has been called into question with respect to the energy sector. Political sanctions against a number of exporters and projects that are actually trying to clear the market place for alternative suppliers has led to its erosion. At the conference, the idea was voiced to try to live without the USA, but even the example of Germany shows how speculative such an idea is. Participants drew parallels between the current sanctions and those imposed by US President Reagan against the construction of the Urengoy-Pomary-Uzhgorod gas pipeline.
During the discussion, a crisis of market relations in the energy sector was mentioned, and assessments about the illness of the market were heard. Yes, the market formally exists, but market relations are becoming less and less effective.
The important point is that sanctions, which promote the notion of right and wrong suppliers, the climate agenda, as well as the situation on the market are forcing hydrocarbon producers and exporters to form new alliances. A few years ago, it was difficult to imagine a joint strategy being adopted by the Russian Federation and Saudi Arabia in the oil market, but we have already witnessed both the first and second OPEC+ deals. Russian Energy Minister Alexander Novak recalled the Forum of Gas Exporting Countries, which could very well become the coordinator of the export policy of a number of gas exporters. The same idea was in the presented report.
The Minister of Energy of the Republic of Azerbaijan Parviz Shahbazov also emphasised the importance of cooperation between hydrocarbon producers, praising the effectiveness of the OPEC+ deal. He called OPEC+ a sustainable and effective mechanism that needs to be expanded to include new producers.
Of course, during the discussion, it was impossible to circumvent the current situation in the market. The coronavirus issue has had a huge impact on the current energy agenda. Energy Minister Novak pointed to a huge shock to the global economy. The fall in oil demand was 25-28% in the worst periods for the market. Investments in the oil industry, in his estimation, will fall by one third in 2020. Therefore, oil producers have taken unprecedented measures to reduce production. OPEC+ countries reduced production by 8.4 million barrels per day, another 3.5 million were cut by the remaining producers (even the United States reduced oil production by 2.25 million barrels). Nevertheless, the excess of supply over demand is 15 million barrels but OPEC+ countries are waiting for stabilisation in July-August.
The panellists believe that the coronavirus pandemic will become an accelerator of the Green Revolution. The environmental agenda, including in the energy sector, will become even more relevant. It is no accident that even oil and gas companies have sought to declare carbon neutrality. Russia and Azerbaijan are both also implementing green energy projects. During the discussion, even the idea of a“Green Eurasia” arose. In addition, it is possible that hydrocarbon consumption will not recover so quickly. However, do not forget that in 2019, hydrocarbons accounted for almost 85% of the global energy balance. And their replacement with other energy sources should not deprive people of the right to development and access to electricity.
The influence of politics on energy is quite multifaceted and nothing new. Recently, however, a new turn has been outlined during the discussion about the presented report, Political Risks in Global Energy: From Resource Nationalism to Molecules of Freedom and Climate Weapons. The report states that most recently, the generation of political risks has been attributed to hydrocarbon exporters and owners of major oil and gas reserves. But now everything has changed because of shale oil, and then the green revolution. They gave hope to the OECD countries that they would be able to get rid of the need to buy hydrocarbons from the Middle East and the former Soviet Union. The United States became the worlds largest producer of both gas and oil, and soon its exporter. A rightful exporter appeared, ready to share a valuable energy resource with its political partners. But they had to pay for the service of diversified supplies. In order to discredit their competitors and convince the world to buy their energy resources, the US began to use political tools in the competitive market.
The green revolution in general must save Europe, first of all, from oil and gas. True, renewable energy remains an expensive and unstable source of energy, and the issue of replacing hydrocarbons in transport, the public sector, chemistry, and a number of other industries has not yet been completely resolved. The share of hydrocarbons in the EU energy balance is still slightly less than 75%. It is very difficult for green energy to defeat traditional energy producers in a free and competitive market thus, the story of the need to combat global warming comes into play.
If earlier, hydrocarbon exporters were accused of using money from exports to consolidate authoritarian rule, now blame is based on the fact that they produce goods that contribute to an increase in the average temperature on the planet. It is possible that even an international climate tribunal will soon appear.
Participants in the conference discussed the example of Nord Stream-2, the construction of which has been openly assaulted via political instruments. Although this gas pipeline complies with international law, and even European goal-setting documents in the field of energy, it has led to a great deal of US pressure on countries that consider it a commercial project. This is primarily true of Germany, which faces the risk of isolation in the Western world. Transatlantic relations have been called into question and only because Germany perceived the gas pipeline as part of the gas business. It turns out that fair competition has been called into question with respect to the energy sector. Political sanctions against a number of exporters and projects that are actually trying to clear the market place for alternative suppliers has led to its erosion. At the conference, the idea was voiced to try to live without the USA, but even the example of Germany shows how speculative such an idea is. Participants drew parallels between the current sanctions and those imposed by US President Reagan against the construction of the Urengoy-Pomary-Uzhgorod gas pipeline.
During the discussion, a crisis of market relations in the energy sector was mentioned, and assessments about the illness of the market were heard. Yes, the market formally exists, but market relations are becoming less and less effective.
The important point is that sanctions, which promote the notion of right and wrong suppliers, the climate agenda, as well as the situation on the market are forcing hydrocarbon producers and exporters to form new alliances. A few years ago, it was difficult to imagine a joint strategy being adopted by the Russian Federation and Saudi Arabia in the oil market, but we have already witnessed both the first and second OPEC+ deals. Russian Energy Minister Alexander Novak recalled the Forum of Gas Exporting Countries, which could very well become the coordinator of the export policy of a number of gas exporters. The same idea was in the presented report.
The Minister of Energy of the Republic of Azerbaijan Parviz Shahbazov also emphasised the importance of cooperation between hydrocarbon producers, praising the effectiveness of the OPEC+ deal. He called OPEC+ a sustainable and effective mechanism that needs to be expanded to include new producers.
Of course, during the discussion, it was impossible to circumvent the current situation in the market. The coronavirus issue has had a huge impact on the current energy agenda. Energy Minister Novak pointed to a huge shock to the global economy. The fall in oil demand was 25-28% in the worst periods for the market. Investments in the oil industry, in his estimation, will fall by one third in 2020. Therefore, oil producers have taken unprecedented measures to reduce production. OPEC+ countries reduced production by 8.4 million barrels per day, another 3.5 million were cut by the remaining producers (even the United States reduced oil production by 2.25 million barrels). Nevertheless, the excess of supply over demand is 15 million barrels but OPEC+ countries are waiting for stabilisation in July-August.
The panellists believe that the coronavirus pandemic will become an accelerator of the Green Revolution. The environmental agenda, including in the energy sector, will become even more relevant. It is no accident that even oil and gas companies have sought to declare carbon neutrality. Russia and Azerbaijan are both also implementing green energy projects. During the discussion, even the idea of a“Green Eurasia” arose. In addition, it is possible that hydrocarbon consumption will not recover so quickly. However, do not forget that in 2019, hydrocarbons accounted for almost 85% of the global energy balance. And their replacement with other energy sources should not deprive people of the right to development and access to electricity.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.
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