After the United States re-imposed oil sanctions on Iran in 2018, Saudi Arabia boosted its oil production, partly in response to pressure from President Donald Trump.
That increase, along with escalating oil production from the United States, helped fend off concerns about the loss of Iranian crude.
Then China reduced its oil imports from the United States to zero as a trade war between the two countries heated up.
After world oil prices tumbled in the fourth quarter of the year, OPEC and Russia agreed to reduce crude production by 1.2 million barrels per day for the first six months of this year.
OPEC members pledged to cut a total of 800,000 bpd while Russia and allied producers accepted a 400,000-bpd reduction, a move that analysts predicted would again shore up world oil prices.
“Oil is always caught up in politics, and vice-versa,” said Jeff Colgan. “That’s definitely a constant thing.”
Colgan is director of security studies at the Watson Institute for Public and International Affairs at Brown University, where he’s also an associate professor of political science and international and public affairs
He wrote the book “Petro-Aggression: When Oil Causes War,” published by Cambridge University Press in 2013.
While Colgan acknowledges that geopolitics has an extensive impact on world energy, he doesn’t always share the common view of its effects.
“I think what grabs the headlines is often overdone,” he said.
For instance, while many commentators talk about a resurgent OPEC, Colgan believes that “OPEC hasn’t had a lot of influence on the production or price of oil.”
“OPEC is powerful only in the sense that its core member is Saudi Arabia, and Saudi Arabia does have some market power,” he said.
As a major player in world oil, Saudi Arabia isn’t hard to figure out in terms of motivation, Colgan observed.
“It wants the oil price to be as high as it can be in the long term, to meet its budget,” he said.
What’s new in the world is the Saudi Arabia-Russia connection of cooperation in managing crude production, an association that overshadows any effort by OPEC, he noted.
“It’s really Russia and Saudi Arabia that have become the axis for world oil production,” Colgan said. “Increasingly, MBS (Mohammed bin Salman), being crown prince, has reached out to Vladimir Putin.”
OPEC’s Ongoing Weakness
Colgan identified the following as three of the four key geopolitical areas affecting world energy today:
- The Russia-Saudi Arabia axis of cooperation
- The various producing country hotspots around the world, “certainly including Venezuela and Libya, and probably Nigeria”
- U.S. foreign policy, currently as related to Iran and China, especially.
In December, Qatar announced it would leave OPEC after being part of the group since 1961. A Middle Eastern country abandoning OPEC points up the organization’s ongoing weakness, Colgan noted.
“I think OPEC has been weak for the past three decades. It’s had real problems in enforcing its agreements. Qatar’s departure in some sense is a result of that weakness, but it also highlights it,” he said.
And Qatar might not be the last member to go. The smaller OPEC member countries once saw a political benefit from joining forces, giving them an outsized influence on world energy matters, Colgan said.
With a population of less than 2.7 million, including 2.3 million expatriates, Qatar is smaller than some U.S. cities, he observed.
“It gave them a seat at the table in world affairs they would not otherwise have had,” Colgan said.
But OPEC’s reputation as a cartel, criticism of its attempts to manipulate world oil supply and frequent infighting among its member countries have made membership less attractive, Colgan observed.
Qatar “started to see OPEC as a net political negative,” he said.
The American X Factor
Political problems in Venezuela and other hotspot oil-producing countries in recent decades led to production constraints and opened a path for new sources of crude to emerge, Colgan added.
“As the internal troubles in those countries continued, it created an opportunity for oil producers in the United States and elsewhere to take advantage,” he said.
This new production coming on-line surpassed demand growth and eventually caused a worldwide oil-price collapse, generating a new geopolitical landscape for energy, according to Colgan.
“The growth of the U.S. oil sector in recent years has really changed the outlook of policymakers about how to think about geopolitics,” he noted.
“The U.S. oil industry is in essence an X factor,” he said.
In addition to rapidly escalating crude production from the U.S., “there’s also all these conversations around about how efficient the U.S. industry can get” at ramping up oil output even at low prices, Colgan said.
He called the outlook both unpredictable and fascinating.
“That’s definitely what’s causing headaches in Riyadh and Moscow,” he observed.
“Another thing that’s interesting is that Iraq, sort of under the radar, has become less of a hotspot. I wouldn’t want to make light of the security problems they have in Iraq, but their oil industry is in a fairly stable place,” Colgan said.
Closer to home, Canada and Mexico are also significant hydrocarbon generators and markets, he continued.
“Pipelines from Canada continue to be an important factor in the price of West Texas Intermediate,” Colgan noted.
“There’s always some oil that could come down from Canada but there never seem to be pipelines available,” he said, specifically citing problems with completion of the Keystone XL pipeline extension.
The fourth key area of geopolitical effect on world energy runs on a somewhat different track, and continues to develop. Colgan cited various attempts to address climate change and curb carbon emissions, with some countries even aiming to ban the sale of purely gasoline-powered vehicles.
Norway and the Netherlands plan to phase out the sale of gas-powered vehicles other than hybrids over the coming decade, and some other countries have set later target dates.
“It remains to be seen how real those targets are. A lot of times we’ve seen more talk than action,” Colgan said.
Historically, geopolitics often has shaped the world energy picture, from World War II to the Arab oil embargo, and during many other periods, Colgan noted. Geopolitics isn’t more of a dramatic influence on world oil and gas now than before. It just feels that way.
Geopolitics and the oil industry are intertwined, and “that’s never going to change,” Colgan said. “It’s been around since the beginning.”