Political Monitor

Politics still shaping oil markets

Energy, Financial Markets

Politics still shaping oil markets

“Geopolitics, by far, is the largest uncertainty in the entire world of energy.”

- unnamed ExxonMobil executive, Private Empire: ExxonMobil and American Power, 2012.

11 October 2014: Oil markets have confounded political pundits in recent months as prices have plunged despite rolling geopolitical crises. But the link between politics and oil is more prevalent than recent prices suggest and the long-term implications remain profound. That’s because many of the decisions leading to excess supply have been made with a view towards the geopolitics of the future.

It all begins with America. As increased production has reduced the dependence of the world’s largest economy on global markets, suppliers from Latin America to the Middle East have scrambled to lock in new customers. And politics is ramping up the pressure as the US moves ever closer to ending its ban on oil and gas exports.

The push for change has gained momentum over recent weeks as the Energy Information Administration (EIA) dismisses the link between the ban on exports and the price of gasoline in the US and Republicans seize control of the Senate.

The EIA report found that domestic pump prices respond to global, rather than domestic, crude oil prices flailing one of the last arguments against exports. And the new Republican Chair of the Senate Committee on Energy and Natural Resources – Senator Lisa Murkowski of Alaska – is already on the record in favour of relaxing the ban. Importantly, she is likely to gather support from moderate Democrats representing oil states. Such an outcome will increase global supply and strike at the economic and political heart of a number of oil backed regimes.

This is the politics driving Saudi Arabia’s unexpected decision to increase supply and drop prices in pursuit of new markets despite its OPEC brethren pushing for price support. That such an approach increases the pressure on the economy of Shia Iran is an added bonus for the Sunni Saudi regime.

Politics was also a key factor in the recently announced $400bn energy deal between Russia and China. The agreement secures supplies for China’s thirsty economy while locking in revenue streams for Vladimir Putin’s petro-regime. Many forces pushed the two countries towards a deal but the desire of both to balance against the US was a key factor.

For Russia the deal weakens the web of sanctions imposed by the West following its annexation of Crimea, while China gains access to critical overland supply routes avoiding potential chokepoints in the Straits of Malacca and Hormuz where access is ultimately controlled by the US navy. This fear is also behind Chinese investment in deep-water harbours in Myanmar and Pakistan allowing oil tankers to offload into overland pipelines running into the west and south of China.

Concern about access through the global commons is also driving China’s support of the Nicaragua Canal. Once considered a pipedream work is set to commence in December following government approval earlier this year. Completion would allow China to avoid the Panama Canal, which it ultimately regards as an instrument of US power, and extend its own influence in the Western hemisphere balancing against the US pivot to Asia.

Politics is also shaping events in Iraq as the Kurds inch towards statehood backed by its control of regional oil supplies while in the Baltic region Lithuania has completed a new LNG terminal - named ‘Independence’ - as it seeks to counter ever present Russian threats to curtail gas supplies to Europe as part of a broader geostrategic power play.

All of these political decisions have increased global supply and will do so into the foreseeable future as the OPEC cartel breaks down in the face of new producers moving to lock in market share and oil dependent regimes scramble to avoid an Arab Spring Mark II. Throw in an energy rich superpower willing to use excess supply to support its allies and you have a market highly susceptible to short term political events and longer term trends. 

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