Where and how to begin this story? The ‘where’ is crucial as this tale crisscrosses continents and nations. The ‘how’ is critical as geopolitical tsunamis fracture friendships and help foes become friends. The political domino effect is visible with the fall of a few leaders. Yet, others become more ambitious, more arrogant, and full of hubris. The eye of the storm lies in disruptive economic disruptions. They were caused by pandemic shocks, followed by post-pandemic price rises due to diverting governments’ stimulus packages into stocks, real estate, and pent-up demand. The Russia-Ukraine war adds more fuel to the ravaging fire.
The Russia-Ukraine war has pushed and pulled oil between $60 and $120 a barrel in the past 12 months. Russia, the second-largest crude exporter after Saudi Arabia and the largest exporter of natural gas, supplies 27% and 40%, respectively, of the EU’s demand. The EU’s ban on Russian oil from the sea, and the decision by Poland and Germany to end flows via pipelines, will curb 90% of Russian imports. Gas will flow, but Germany froze plans for a new bilateral pipeline. Europe may be in the grip of a really cold winter, coupled with skyrocketing prices. The short-term options, states a UN study: seek non-Russian sources, reduce demand, and pursue energy efficiency.
Gas producers can reduce flaring; the UN report states that half of it “happens within 20 km of pipelines”. The sellers can earn $90 billion if they tap the waste. An expert in McKinsey, a global think-tank, feels the EU can fill storage capacities before winter. Japan and South Korea can divert strategic reserves meant for emergencies to Europe and Asia. Central Asia can be a game-changer. A blog on the Atlantic Council website explains that if gas from Azerbaijan and Turkmenistan reaches Turkey, it will free up Turkey’s imports of liquefied natural gas (LNG). As per McKinsey, LNG is expensive and can punch a $78-billion hole in the EU’s pockets.
Iran, a former rogue nation, will play a significant role thanks to its energy swap arrangements with Azerbaijan, Turkmenistan and Turkey. In addition, Europe will push back ‘Climate Change’ targets, revive coal-fired power plants, and delay nuclear power shutouts. Belgium deferred its nuclear deadline (2025) by a decade. Germany will not adhere to its plan to eliminate nuclear power (2022) and coal-fired units (2038). ‘Green’ initiatives (solar, electric, and other renewable sources) now seem like costly “children’s games”.
This emerging and delicate but fast-changing equilibrium went for a toss because of OPEC+, an energy producers’ cartel led by Saudi Arabia and Russia. It decided to curb oil production. Saudi Arabia dubbed this a pragmatic move in anticipation of a global recession. But King Mohammed bin Salman (MBS) wants higher crude prices for personal and financial reasons. MBS aims to pitch the capital, Riyadh, as a counter to Dubai. His dream to build a trillion-dollar “futuristic desert” city, Neom, hopes to wrest regional socio-economic power away from the UAE.
The Saudi King wishes to escape the stranglehold of boom and bust cycles in the energy sector. The downward spiral happened during the global recession in 2008 and in 2016, when oil prices crashed below $30. After eight years of budget deficits, states a piece on the CNN website, Saudi Arabia may show a surplus this year. But only if oil remains above $79, says an IMF report. Since MBS’ visit to Moscow in 2017, he and Russia’s Vladimir Putin evolved “converging grand strategies” towards a multi-polar world where the US is one of the major superpowers.
MBS is “ready to say no to America”, believes an Emirati political scientist. Accusations that MBS was behind the murder of Saudi journalist Jamal Khashoggi in 2018, the US’ proximity to Saudi’s arch
regional rival, Iran, the West’s criticism of the Saudi-Yemen war, and meddling in MBS’ palace intrigues have worsened the growing disconnect with the US, an ally of nearly eight decades.
Joe Biden, the US President, called MBS a “pariah” during election speeches, made a volte-face, visited Saudi Arabia before the recent OPEC+ production cut, and later warned about “consequences” for what Saudi Arabia did. He claimed that the cuts were made to shore up Putin’s coffers through higher crude prices. Democrat supporters charge that MBS wants to help political opponents, Republicans, in the domestic mid-term elections in November 2022.
Local American politics is an issue. Saudi revealed that Biden asked MBS to postpone the cuts by a month or nearer to the mid-term elections. Biden loyalists contend that the few weeks’ delays were to see how oil prices moved. This angered Republicans. Fox News blamed Biden’s “extremist green agenda” for high retail prices. Republicans claim that Democrats shut down energy leases in the country and held back production. This may not be true, and one of the largest offshore leases in the Gulf of Mexico last year was blocked by a federal court.
Russia is walking a dangerous yet calculated tightrope. A study predicts that Putin can lose $1.4 trillion due to losses from lower exports of fossil fuels. This will lead to a negative GDP growth of 9.6% in 2022, as per an article on a website that deals with research in power and technology.
Russia diversified buyers, roping in India and China with discounted prices. But this may not be enough. According to a website on EU diplomacy, as China tightens supplies from Russia, it may be tougher to import from pro-West nations. India wants to keep Russia, the US, the EU, and the Middle East happy.
According to another website, since the western sanctions after Russia annexed Crimea in 2014, Putin used energy revenues to build foreign exchange reserves of $630 billion. Conservative fiscal policies enabled him to balance the budget based on an oil price of $45. Such measures, points out economic historian Adam Tooze, insulated the economy. So, the Kremlin can take the GDP shocks.
China, which has pursued slower growth rates in recent times, can withstand the tremors. India’s economy seems decoupled from politics, and the ruling regime is less bothered about GDP. But can the rest of the world cushion itself from fuel, food, and human costs? The UN study states, “A vicious cycle of the increasing cost of living and rising poverty and social discontent is unfolding in many countries….”
Alam Srinivas
Independent journalist and author
(alamsrinivas@gmail.com)