Geopolitics of Energy

More than three million Venezuelans have fled poverty, hunger, violence, and persecution in recent years, journeying throughout the Americas and Southern Europe.

In a sign that anxiety about oil security of supply isn’t what it used to be, the Group of Twenty (G20) meeting broke up this week with no big joint statements regarding how to protect the freedom of navigation in the Strait of Hormuz. From the sidelines, U.S. President Donald J. Trump said there was “no rush” and “no time pressure” to ease tensions with Iran. German Chancellor Angela Merkel said she advocated “very strongly” to get into a negotiating process on the Iranian situation. Chinese President Xi Jinping noted that China “always stands on the side of peace and opposes war.” The latter statement was a pretty mild one given that approximately one-fifth of the oil that passes through the Strait of Hormuz is destined for China. China has given no public indication that it plans to protect its own shipping. Roughly 60 percent of crude oil passing through the Strait goes to China, Japan, South Korea, and India. The biggest statement about oil that emerged from the G20 came from Russian President Vladimir Putin who announced at the sidelines that Russia had agreed with Saudi Arabia to extend by six to nine months a deal with the Organization of Petroleum Exporting Countries (OPEC) to restrain oil output to support oil prices. OPEC then announced at its July 2 meeting in Vienna it had agreed to extend the deal for nine months into the first quarter of 2020. In speaking about OPEC’s deliberations, Iran’s oil minister said OPEC was being used as a “tool against Iran” jeopardizing the cartel’s survival. Last year, Iran told other members it was considering quitting OPEC. These various events say a lot about how the geopolitics of oil has changed and the huge implications those changes have for Iran. A decade ago, countries from the Gulf Cooperation Council (GCC) were of the mindset that they would never let Russia become a member of OPEC. At the same time, Iran was also a major rival to the GCC countries in its overall influence on OPEC outcomes, and both Russia and Iran boasted of their relations with each other in bolstering their respective positions in Mideast regional conflicts. But the new reality is that countries like Saudi Arabia now feel that they can basically ignore Iranian sensitivities at OPEC gatherings and have increased incentive to align with Russia on oil, not only because of the pressing need for revenue but also because of the geopolitical benefits of driving a wedge between Russia and Iran. In turn, Iran may have less to offer Russia as Moscow’s relations with the Arab world continue to improve, except perhaps the possible threat Tehran can make trouble for Russia in Syria or along susceptible pipeline routes. U.S. sanctions against Iran have long been in Russia’s interests to prevent Iranian oil and gas arriving in Europe to compete for its market share. But, Russia has a difficult road to navigate in its relations with Iran and Saudi Arabia since it will want to keep itself an important power broker around many of the Mideast’s current conflicts. This keeps U.S.-Russian interactions on the topic of Iran a challenging one.  The results of the G20 and subsequent OPEC meetings highlight the bind Tehran is in. What will be its geopolitical lever if oil and gas, which might have provided in years past, is no longer working? The large market surplus of natural gas is working against Iran. Japan’s state firm Japan Oil, Gas and Metals National Corporation (JOGMEC), for example, just signed on to Russia’s Arctic liquefied natural gas (LNG) expansion, in a sign that many countries that might have bought natural gas from Iran are looking elsewhere. The expected rising supplies of U.S. LNG are another. Chinese firms have also slowed new rounds of investment in Iran’s oil and gas sector and are increasingly investing in China’s own clean tech industry instead. Iran has to concern itself with the fact that as the United States, Russia, and oil producers in the Persian Gulf region expand capacity, its own reserves may become more likely to become obsolete or devalued if oil demand peaks over time. All this raises the question about how a petro-state like Iran reacts to the possible weakening of oil as a strategic tool. Iran will want to show the world that it still has a bargaining chip beyond its own oil resources. Some analysts are suggesting that by boxing it into a corner, the Trump administration might actually incentivize Tehran to lash out to make clear it is too important to ignore in an effort to drive the United States and others to the negotiating table, much the way North Korean missile tests got President Trump’s attention. Most recently, Iran’s response has focused on restarting its nuclear program. Iranian President Hassan Rouhani announced Tehran would return to its previous activities at the Arak nuclear reactor if the remaining signatories to the nuclear deal do not fulfil their promises. Iran might decide to focus on fast tracking its nuclear program to assert itself and gain leverage at a future negotiation. Alternatively, if it gets no geopolitical traction from restarting its nuclear program, Iran could stick with its grey area attacks on energy facilities to make the point it still has hard power to bring to bear. To date, the rules of engagement on cyber warfare against such targets have been harder to establish. A cyber escalation would be a dangerous outcome that would leave the United States with hard decisions about what kind of precedents to set in an active cyber conflict since a large escalation could lead directly to attempted cyberattacks against the U.S. homeland. Oil markets are betting that Iran will not choose to continue to disrupt shipping through the Strait of Hormuz since doing so would clearly escalate into a military confrontation with the United States. A second possibility, which would require much more diplomacy, is that Iran’s oil woes could prompt its leaders to look at the world with colder realism and come directly to the diplomatic route. One reason that approach could be compelling is that perhaps the real lesson for Iran is not that of North Korea, but of Venezuela whose oil industry is now decimated from years of corruption, lack of financing for maintenance, and an exit of foreign investors. As Mideast oil expert Sara Vakhshouri wrote in a report for the Atlantic Council in 2015, “Most of Iran’s oil fields are old and mature, which means they require further investment and treatments like gas reinjection, in order to maintain current production levels. The country’s oil wells are mostly in the second half of their lives, and are facing continued natural depletion of production capacity at the rate of 8-11 percent per year. It is estimated that Iranian oil fields lose between 300,000 to 500,000 b/d of natural reduction every year due to maturity of fields.” With its oil exports further curtailed this year, Iran should worry about not only losing market share today (and for however long it takes to restore its position in the global economy), but also the possibility that output drops could cause it to lose productive capacity more permanently if oil fields are damaged from forced production curtailment or reduced spending on maintenance over time. As Iran can see from its current failure to incentivize relations with Europe, Russia, India, China, and Japan by offering future stakes in its oil sector—a strategy that worked in the past but is apparently no longer effective—time is not on its side when it comes to preserving its future oil and gas sector opportunities.

I woke up this morning thinking I would write a blog explaining just how challenging it would be for Iran to close the Strait of Hormuz for a prolonged period of time. This is not to say that there could not be a battle in the waterway: Iran has lots of conventional weapons, including mines, submarines, a large fleet of speed boats (think the USS Cole bombing), torpedoes, and missile batteries. But I thought to myself, why would Iran want to give the U.S. military the rationale to target Tehran’s largest military assets and destroy them? Then I saw a news report that a short range Katyusha missile hit a site very close to ExxonMobil’s operations center in southern Iraq, near the Zubair oil field, where Italian oil firm ENI is helping restore production capacity. Royal Dutch Shell also has personnel in the area. That brought me back to my father-in-law’s favorite expression “Too clever by a half.” For those of you who don’t know that term, the internet defines it as meaning “annoyingly proud of one’s intelligence or skill and in danger of overreaching oneself.” I don’t think that definition, though accurate, does the phrase justice. The formal definition doesn’t fully convey the high level of arrogance and stupidity involved when someone makes an incredibly large mistake because they think they are outsmarting someone when in reality they are about to create a huge disaster for themselves. Now you could be wondering: Am I talking about Iran or the United States? Let’s talk about both. Iran is so used to working through proxies with no consequences on its ruling elite or its physical motherland that it believes that it can offer these endless, faceless “sabotage” operations with impunity.  On the flip side, the United States is used to stationing an aircraft carrier somewhere and believing that it is a solution to small-scale attacks (e.g. weaker party doesn’t want an actual military engagement so they back down). This, however, fails to recognize that force projection in the age of asymmetric warfare may not be the most effective deterrent. It begs the question of “proportional” response. Iran is hoping for that messy debate. That is why it appears that Iran could be selecting discrete high-value targets with methods that are hard to fingerprint.  That brings me back to Iran’s original threat, when the United States announced it was withdrawing from the Joint Comprehensive Plan of Action (JCPA) nuclear deal and reimposing sanctions on Iranian oil exports. Iranian President Hassan Rouhani said “If one day they [America] want to prevent the export of Iran’s oil, then no oil will be exported from the Persian Gulf.” And that brings me to my favorite parenting advice for raising a two-year old. Don’t threaten something if you don’t intend to carry it through. As the United States considers the uncomfortable decision on how to convey diplomatically or, in the worst case, militarily that continued attacks on oil installations across the Persian Gulf will not be tolerated, it needs to acknowledge that Iran has many ways to harass oil exports to the international market. As I wrote previously, referring to all these efforts as “sabotage” underplays their significance. The inventory of oil attack events to date is starting to be extensive. It includes attacks on shipping via missiles from Yemen, attacks via missiles in Iraq, attacks on oil and petrochemical feedstock shipping with limpet mines, attacks on regional oil facilities using drones, notably in Saudi Arabia, several major cyber incursions against the Saudi oil and petrochemical industry, and sabotage activities that led to explosions on oil pipelines across the region, notably in Bahrain. Then there is the possibility that the contamination of oil coming from Russia to Europe was more malicious than it appeared. I have written a book with economist Mahmoud El-Gamal on the close linkages between the seminal business cycle, the oil price cycle, and Middle East geopolitical violence. We updated that work in a journal article that highlights how the more lasting impact of war-related damage to oil facilities is endemic to lasting oil price volatility. The problem for both the United States and Iran is that the global rules of engagement for asymmetrical attacks on energy facilities are extremely unclear. If the United States hits Iran with traditional fire power against Iranian military targets to deter further conventional attacks on oil exports, will that address the cyber domain or not? Does cyber have to address cyber? The patterns of engagement are unclear and that is dangerous for all concerned. That lack of clarity raises the stakes of a miscalculation, especially on the Iranian side. The anonymous declaration this week in the New York Times that the United States military is stepping up its digital incursions to Russia’s electric power grid highlights the challenge of deterrence. Iranian cyber incursions into U.S. infrastructure date back many years. There is a tendency among geopolitical commentators to dismiss the usefulness of diplomacy in stale conflicts. One often hears talk that there is little possibility for a reset of the Iran nuclear deal, hence no point to dialogue between the United States and Iran either directly or through intermediaries. This is clearly incorrect. The problem with that logic is that diplomacy is often needed so countries do not misunderstand the progression of events that could result from a string of ambiguous situations. In the case of asymmetric attacks on energy, diplomacy is sorely needed to define those ambiguities and bring transparency to what constitutes a clear and present danger.   

As the need for U.S. federal government engagement on climate change becomes more pressing, various leaders and agencies are stepping into the void. This week, the U.S. Government Accountability Office, a legislative branch government agency that provides evaluation and investigation services for the U.S. Congress, issued a report critical of the U.S. Department of Defense’s practice of basing responses to extreme weather events and climate change effects based on past experience and called on the Secretary of Defense to issue guidance on “incorporating climate projections into installation master planning” as well as facility project designs. The guidance should cover how to integrate multiple future scenarios, what scientific projections to use, and what future time frames to consider, the GAO suggested. Recently, the Council on Foreign Relations program on Energy Security and Climate Change convened a workshop on related issues. The program entitled “Climate Risks to the Energy System: Examining the Financial, Security, and Technological Dimensions” concluded that U.S. energy infrastructure is increasingly at risk to climactic changes and that the United States is ill prepared to address those risks, which are a serious matter of national security. In the report from the CFR workshop it was recommended that Congress require the Department of Homeland Security and the Federal Emergency Management Agency (FEMA) to update risk assessments to include detailed analysis by geography, infrastructure type, and detail of potential specific climate hazards to better identify future climate-related vulnerabilities. This is important for the U.S. energy system generally and to energy supplies to U.S. military bases and operations specifically. Such regional and local assessments should be shared with the U.S. Army Corps of Engineers and FEMA as a basis for planning capital expenditures for adaptation and evacuation. The release of the GAO report release came around the same time as hearings at the U.S. Commodity Futures Trading Commission (CFTC) on June 12 where Rostin Behnam, a CFTC regulator, told the New York Times that “It’s abundantly clear that climate change poses financial risk to the stability of the financial system.” Behnam’s comments echo similar concerns raised recently by the Bank of Canada and the European Central Bank. Democratic Presidential candidates are also joining the mix. Washington Governor Jay Inslee has made climate change his signature issue. Former Vice President Joe Biden has also publicly put forward a climate change plan and responded positively to calls for a Democratic televised debate on the topic. Climate change affects virtually every aspect of the U.S. energy system. U.S. infrastructure for electricity, fuel, and information are highly interdependent, meaning that a failure in one part of the system can have cascading effects on other critical parts of the U.S. economy. Climatic disruptions to domestic energy supply could be large, entailing huge economic losses and potentially requiring sizable military mobilizations. California faces particularly difficult questions about how to resolve the bankruptcy of its major electric utility PG&E whose faulty equipment caused several costly wildfires last year and has raised the possibility of market failure in local private insurance markets. Texas is debating a multibillion dollar publicly funded program to build a seawall to protect its storm-vulnerable coastal refineries responsible for about 27 percent of U.S. military grade jet fuel and 13 percent of the nation’s gasoline production. CFR workshop participants expressed concern that the U.S. Security and Exchange Commission (SEC) is not doing an adequate job ensuring that disclosure of material risks related to climate change are accurate and sufficiently detailed. This year, the SEC received an active slate of shareholder proposals related to climate change but so far has dragged its feet on initiating any new disclosure guidelines on the subject. The SEC needs to establish permanent disclosure standards for climate change related risks to publicly-traded energy companies and utilities, the CFR workshop concluded. To explore best practices towards possible improved disclosure rules, workshop participants recommended that the SEC participate actively in fact finding forums to gather feedback from institutional investors, energy firms, financial analysts, and other relevant market participants.

The decision by the United States to wind down waivers on U.S. sanctions against Iranian oil exports has laid bare some new realities about oil geopolitics that were previously not well understood. Oil supply shortages --regardless of whether they are orchestrated by the Organization of Petroleum Exporting Countries (OPEC) or come about from sabotage of oil facilities or escalating military conflicts in the Middle East-- are more China’s problem than the United States’ worry. President Trump muddied the waters of that perception by simultaneously bragging about U.S. freedom molecules (e.g. U.S. oil and gas exports), but then constantly jawboning OPEC to keep oil supplies high. No doubt Americans care about gasoline prices and don’t stomach petro-blackmail well, but everyone from Iran’s Supreme Leader Ayatollah Ali Khamenei to Wall Street hedge fund strategists are focused on how President Trump cannot afford let U.S. gasoline prices rise in an election year, and they are missing the forest for the trees. It is the Chinese economy, not the U.S. economy, that stands to lose the most from oil supply cutoffs. China’s oil imports have been rising and hit over 10.6 million barrels a day in April as the country’s refiners built up stockpiles ahead of expected disruptions from Iran and Venezuela. That begs the geopolitical question: Who does Beijing consider a reliable energy supplier and can they afford to skip U.S. oil and gas exports? If you are President Trump, you are probably thinking the answer to the second part of that question is no, especially since you are cutting off supplies from Iran. To address the reliability issue, let’s take a tour of Chinese suppliers. Saudi Arabia has been quietly shifting oil from the United States, where imports from the desert kingdom are nearing low levels not seen since the mid-1980s, to China where it is now the largest supplier to the Asian giant. But China has to worry about Saudi production cuts as part of future OPEC agreements as well as attacks on Saudi oil infrastructure.   Igor Sechin, head of Rosneft, told the St. Petersburg International Economic Forum this week that China and Russia should increase their oil trade. The statement coincided with bilateral meetings between Russian President Vladimir Putin and Chinese leader Xi Jiping in Moscow.  But Chinese investments in Russian oil firms have run afoul in recent years and the massive contamination of oil supplies shipped via the Druzhba pipeline to Europe is raising questions about Russia’s reliability as an energy supplier. China’s $160 plus billion in investments in foreign oil fields to garner secure equity crude oil supply in rogue petro-states has not panned out well. Several oil states have defaulted on Chinese loans or failed to deliver the promised oil. Most recently, oil payments by Venezuela to cover its $60 billion in borrowing from Beijing has fallen by the wayside as the country’s oil production has collapsed. Prolonged civil wars in Sudan and South Sudan have severely restricted the amount of oil Chinese companies could extract. Now with U.S. sanctions, oil shipments from Iran are in question. Angola, another important Chinese supplier, could see its production plummet by a third in the next few years if it cannot shore up investment. All this puts more importance on other Middle East supplies, which could face increased geopolitical risk if the escalating conflict between Iran and Saudi Arabia leads to additional sabotage against Persian Gulf shipping and production. Iraq, Kuwait and the United Arab Emirates are major suppliers to China. When the trade war with the United States worsened last year, Chinese firms curtailed spot market purchases of U.S. crude oil. It remains to be seen what the long run ramifications of less transitory, more structural worsening of U.S.-China relations would mean for energy ties. Presumably, China would intuitively feel relying on U.S. oil supplies would be strategically risky. And then, there is just the worry that the Gulf of Mexico hurricane season or a rapid downward spiral in oil prices could mean U.S. oil exports levels suddenly sink. All this leads back to the main point. China, which has no real experience in jawboning OPEC for more supply because it was energy self-sufficient in 1973, and even in 1990 when Iraq invaded Kuwait, has not grappled yet with this new reality. To date, China’s complaints have focused on complaining about U.S. policies towards Iran. That belies the fact that China is freeriding off the U.S. President making statements about the need for adequate supplies from OPEC to keep the global economy from slowing down. Moreover, the United States is accommodating China by making those statements, even as Washington cuts off access to Iranian oil. That raises an important question: when (and in the future, if) Saudi Arabia and Russia fail to respond to U.S. appeals to put more oil in the global market, are they secretly, or at least inadvertently, attacking China? It is a question that bears asking in Beijing. Even if Russia and Saudi Arabia have offered China extra oil in recent weeks, if that oil is just coming from elsewhere in the market (e.g. commodity shuffling) and doesn’t reflect added barrels, as is currently the case, the bill could someday be sent to Chinese consumers in the form of higher oil prices and a shrinking trade surplus.

This is a guest post by Chris Bronk, assistant professor of computer and information systems and associate director of the Center for Information Security Research and Education at the University of Houston. In the development of new information technology (IT) there exists a degree of irrational exuberance. Indeed, consultancy Gartner has described the innovation to adoption process of IT as a “hype cycle,” in which the peak of our inflated expectations is soon followed by a trough of disillusionment and an eventual plateau of productivity in which a technology becomes suitably mature. 5G, the Fifth Generation of mobile wireless technologies, is somewhere in the hype cycle. There has been much conversation about 5G, and it will produce some novel capabilities, but a lingering question exists about how much energy it will consume vis-a-viz prior wireless mobile networks. Before 5G’s energy consumption issues are discussed (along with some interesting energy features), it’s useful to know some of what will make it a significant improvement on the current, Long Term Evolution (LTE) systems that our smartphones and other cellular wireless devices use today.  The main event is that 5G will be faster, perhaps as much as twenty times as fast as current LTE networks. It will also be very low latency, which means that the speed at which 5G signals are sent and received will be effectively imperceptible. How fast? Researchers at Deutsche Telekom have reported latency figures of 3 milliseconds (ms). Consider that the amount of time it takes for visual stimuli to travel from the eye to the brain is about 10 ms (LTE latency is about 50 ms). This low latency means that applications in which instantaneous communication is necessary become more possible – think self-driving cars whose processing is faster than the human brain sharing the road via distributed computer control. Such systems could allow traffic flows to be fully automated. No more traffic lights! So what makes 5G different? The transformative nature of 5G will largely be achieved in how radio frequency is allocated and employed. Current U.S. mobile devices “talk” to the network at frequencies from 700 megahertz to 6 gigahertz. This service will continue because base stations (i.e. cell phone towers) at these bands allow for the transmission of data by radio over significant distance. What’s new is in the millimeter wave bands – 24-86 GHz. This slice of radio spectrum can carry large amounts of data, but not nearly as far. That’s where considering energy usage comes in. A lot more equipment needs to be installed and potentially more data needs to be processed. Additionally, energy efficiency needs to be a core design principle. First of all, however, it is important to note that millimeter wave communications are prone to interference. For example, radio at above 20 GHz doesn’t go through walls well. It doesn’t go through leaves well. It doesn’t play nicely with rain. What does this mean? Many, many more antennas. Suddenly 5G starts sounding like WiFi or maybe some evolution of WiMax technologies. In other words, interference means different infrastructure. A number of significant differences exist between LTE and 5G when considering energy usage. First, because of the new millimeter band pieces of spectrum used, there will likely be a densification of existing cellular networks with the massive addition of small cells and a provision for peer-to-peer (P2P) communication. In 5G, simultaneous transmission and reception will be possible, which likely necessitates new investment in fiber optics to move the data. Some wireless functions will move to cloud processing and much more of the infrastructure will be virtual in nature. So what’s the energy angle? Computers use electricity. But how much? This is a question my colleague Krishna Palem and I worked on answering about a decade ago. The problem then was that computer microprocessors had developed a heat problem due to the high frequencies of electric current involved (upwards of 2GHz). Device consumption numbers were increasing, which led to wondering if computer energy utilization was going to rise rapidly and begin rapidly gobbling up much more electricity. At the time we did the work, we assumed that about 3 percent of global energy use was in the IT sector, but some things were hard to measure – like energy usage in cell phone networks. We developed a term for pushing innovation in energy efficiency – a sustainability innovation quotient (SIQ). No, it didn’t take off like wildfire, but efficiency innovation is now widely considered when building new computing hardware. We moved on. What about power consumption in networks? Someone else picked up the ball of calculating energy usage for IT networks. Now this is not a piece about Huawei, but it turns out that the person doing academic research in the same energy analysis vein as we were is a Swedish academic – Dr. Anders Andrae – an employee of Huawei. Because Huawei ships a large amount of networking hardware, it is able to produce solid estimates on electricity demand. Measuring networking power consumption requires the capacity to determine how much energy wired and wireless networks consume. These amount to fairly big numbers of devices and power draw. According to Huawei’s Andrae, fixed access networks consumed about 167 TWh of electricity in 2015 while wireless networks consumed roughly 50 TWh. That’s a big number – 1 TWh is a trillion watts/hour. For perspective the average American household consumes 7,200 kWh of electricity per year, but remember the networking numbers are global figures. Because energy efficiency has become a priority, an efficiency measure, the number of bits transmitted per Joule of energy expended, has become a standard. Having an efficiency metric to work with is useful especially as electricity costs in providing mobile phone/data service represent about 70 percent of the bill. However, a common concern is that if 5G offers much greater speed, say twenty times as much, a similar rise in energy consumption could follow. “A general concern is that higher data rates can only be achieved by consuming more energy; if the EE [energy efficiency] is constant, then 100× higher data rate in 5G is associated with a 100× higher energy consumption.” This is where headlines like, “Tsunami of data could consume 1/5 of global data by 2025,” come from. The data in R&D on this topic are not nearly as discouraging. Today’s cellular site delivering 28Mbit/sec has an energy consumption of 1.35kW, leading to an EE of 20 kbit/Joule. Recent papers report EE numbers in the order of 10Mbit/Joule in 5G systems. So, it’s pretty clearly understood that just allowing unabated increases in power consumption is impossible and the aim for industry is to push energy utilization down, significantly. To the Future! In addition to transmitting or harvesting data, energy can also be moved in 5G networks. With 5G, one of the novel technologies being considered is Radio Frequency (RF) harvesting; converting energy in transmitted radio waves to user devices or even wireless infrastructure (microcells, antenna arrays, etc.). Since RF signals can carry both energy and information, theoretically RF energy harvesting and information reception can be performed from the same RF input signal. This scheme is referred to as the simultaneous wireless information and power transfer (SWIPT). The hardware to support this doesn’t exist yet, but it has promise. However, since the operating power of the energy-harvesting component is much higher than that of the information decoding component, the energy harvesting zone is smaller than the information transmission zone. The Data Center Blues Unfortunately, another energy problem afoot. Although efficiency is now one of the elements incorporated into designing the next generation of mobile telecommunications infrastructure, the vast proliferation of devices, including those labeled the Internet of Things (IoT), will add up to additional energy consumption. Our biggest area of concern, however, is in data centers. Radoslav Danilak asserts that data centers will consume exponentially larger amounts of electricity, arguing, “consumption will double every four years.” While powering data centers with renewable sources is an aspirational goal of the IT industry, of equal importance is increasing energy efficiency. Yale’s Environment 360 program noted, “Insanely, most of the world’s largest centers are in hot or temperate climates, where vast amounts of energy are used to keep them from overheating.” Placement matters in keeping cooling costs down, but designing energy efficient processors and other components for servers is also important. Global data processing does not appear anywhere near a, and 5G will add to the global energy bill of both telecommunications firms and those that conduct computing in the cloud. So what’s the bottom line?  A lot of hyperbole surrounds 5G. The energy consumption issue is being addressed by all of the major equipment manufacturers. Carriers can’t afford massive, new power costs and will not deploy technology they can’t afford to operate. The deployment time for large and complete 5G networks will not be overnight and what constitutes 5G isn’t fully sorted out, but out of control energy consumption growth is not in the cards. That there could be innovation in how energy is harnessed and transmitted is a potentially important area for innovation. Our assumptions can and will change.

It’s a geopolitical jungle out there in the oil world right now and only the fittest will survive. The new oil Darwinism is replacing the older thesis that all producers can succeed over time because the current lack of adequate capital investment is going to create an oil supply gap in the future that will once again boost oil prices (the so-called supply hole thesis). There are still some active looming supply crunch proponents who are talking down the potential of U.S. unconventional oil and gas, but recent announcements by ExxonMobil and Chevron about robust plans for U.S. onshore drilling appear to dispel the notion that a debt-ridden U.S. industry is on the verge of potential failure. Projected Permian oil production for the two American oil majors alone is 1.9 million barrels a day by 2024, on top of already robust output from U.S. independent oil companies. Citi estimates that U.S. oil production increases could fill most of the expected increase in oil demand for the next five years. That could leave OPEC in a bind, Citi suggests, since the producer group could lose up to three million b/d of market share to U.S. producers if it chooses to cut production to defend $65 oil prices, according to Citi estimates. The unexpected success of U.S. shale has - for the time being - been ameliorated by the dramatic demise of output from within OPEC’s ranks. A variety of ongoing problems from civil unrest to sector mismanagement have created supply disruptions from Nigeria, Libya, Algeria, Venezuela, and Iran, the latter two impacted additionally most recently by U.S. sanctions policy. The situation prompted one Middle East oil leader to note privately that OPEC’s stronger members will take market share from smaller, more troubled OPEC members whose sectors are continuing to stumble. In the past, OPEC’s largest producers Saudi Arabia, the United Arab Emirates, and Kuwait have stepped in to replace fellow OPEC member oil exports disrupted by sanctions or war. The process has often created acrimony inside the producer group, especially when new production sharing agreements are required when and if a disrupted producer’s oil output is restored. This time around is no different. Iran, whose oil exports have recently been curtailed by U.S. sanctions, threatened to quit the organization at OPEC’s end of year meeting last December in Vienna amid accusations that Saudi Arabia and Russia were taking advantage of its conflict with the United States. A last minute compromise, orchestrated by Russian energy minister Alexander Novak, salvaged the tense situation by promoting a compromise, which exempted Iran from the wider OPEC-Russian production cut agreement. In the longer run, cohesion might become more difficult for the current OPEC grouping as divisions arise between members whose industries are deteriorating and need sharply higher prices to offset declines and those who can cope with new competitive forces and still be able to expand. For the time being, OPEC’s larger members are trying to preserve the organization while at the same time, embarking on strategies to cope with future challenges. Abu Dhabi’s national oil company (ADNOC) is partnering with Western firms to apply new technologies to boost capacity to five million b/d by 2030 and is looking for refining assets abroad. Saudi Aramco is pursuing a sophisticated strategy that includes diversification into natural gas, petrochemicals and trading as well as making sure to keep its production costs low to extract as much revenue as possible from legacy assets. But beyond diversification strategies, officials from OPEC’s big guns - Saudi Arabia, Kuwait, UAE and Iraq - have such low cost production that they are assuming that they can be the last ones standing. But while it might be tempting among Middle East producers to forge a policy to wait for U.S. shale to peak and sputter out in the coming years, it is early days on drilling technology innovation with new ideas on how to tap improved data, automation, lasers and CO2 injection to improve recovery rates not only in the United States, but around the globe. All that technology might mean that pure geology (e.g. ultimate size of reserves) might not matter as much as stable access to capital as a new winning characteristic of the future Darwinian challenge in oil. Thus, in the new Darwinian oil world, we can expect to see continued announcements about how low the largest players can go on costs. ExxonMobil threw down the gauntlet recently by stating its next Texas Permian oil increment will come at price tag of $15 a barrel, substantially below break evens for some of the smaller U.S. companies operating in the Texas shale. It’s also well below the kind of oil prices needed for OPEC’s member fiscal budgets which require oil prices to range from at least $45 to as high as $80 a barrel, depending on the country. As a new report published by Council on Foreign Relations on the Tech Enabled Energy Future notes, the convergence of automation, artificial intelligence, advanced manufacturing and big data analytics is poised to remake the transportation, electricity, and manufacturing sectors in ways that could eliminate oil use just at the same moment when those same technologies could make it easier and cheaper to extract oil and gas. As digital energy technologies take hold, large oil producers will have to consider whether their reserves could depreciate in value over time if they delay oil production and development in an effort to hold up prices in the present and garner short-term revenues. This reality is adding to the challenges many oil producer governments already face from mounting budgetary stress, prompting widespread calls for energy sector reforms in a host of oil states around the world. In the new digital energy world, fittest is being redefined and access to the largest reserve base will no longer be the overwhelming metric for success. The winners and losers could prove surprising.

Amin Nasser, Chief Executive Officer of Saudi Aramco, whose shareholder is a sovereign nation, weighed in this week with a warning against U.S. and European activist shareholders who are making demands of the world’s largest publicly traded oil companies. Nasser told an industry audience in London that the oil industry faces a “crisis of perception” among its stakeholders that puts at risk its ability to supply energy to billions of customers around the world. In a speech to International Petroleum Week in London Tuesday, Nasser outlined “urgent, collective effort” the oil industry must take to counter the perceptions crisis. Such steps would include pushing back on narratives that oil is a bad financial investment because demand might peak soon and offering the development of cleaner fuels that respond to consumer concerns about environmental, social, and governance issues. The speech comes on the heels of an active proxy season in the United States and Europe where shareholders of the largest oil companies, whose stocks are publicly traded, have asked the firms for transparent reporting on  how they will reduce the carbon footprint of their products and operations in line with the 2 degrees Celsius Paris climate accord goals, including setting concrete short, medium and long term targets for reductions. ExxonMobil has formally asked the U.S. regulatory agency, the Securities and Exchange Commission (SEC), to reject the shareholders efforts to bring the resolution to a vote at ExxonMobil’s annual meeting in May. Royal Dutch Shell has already adjusted its strategies to reflect similar requests and will link future executive pay to emissions reductions achievements. The company announced recently that it was buying German residential solar battery maker Sonnen and investing in electric vehicle charging stations in Europe in addition to its hydrogen fuel business in Germany. BP is also moving into the EV charging business, and has agreed to demonstrate how its business will align with Paris climate goals including executive remuneration based on emissions reductions. Chevron’s shareholders are asking for information on the company’s strategic vision and response to climate change risks and opportunities. Goldman Sachs is under pressure from activists this year to reduce the carbon footprint of its loan and investment portfolios. France’s Total whose stock performance has outpaced others in the last year, tweeted today that “It’s not about putting a green paint on @Total’s logo but a real evolution of our energy mix”, projecting that the company will hit 10 to 20 percent low carbon electricity by 2040 on top of 45 to 55 percent natural gas, leaving liquid fuels (oil and biofuels) at only about a third of the company’s product mix by 2040. The oil industry has trendlines to point to in its narrative that oil is hard to move away from. Global oil use climbed 1.3 million barrels a day in 2018, according to the International Energy Agency, amid stronger oil use in China and India. IEA projects similar growth for 2019. China’s oil use rose by 440,000 b/d last year, despite a 17 percent decline in car purchases. More surprising was higher U.S. oil use, which topped 540,000 b/d in growth last year as the American economy expanded. New academic studies reveal that economic expansion is once again linking to a rise in U.S. vehicle miles traveled (VMT) since 2012, dispelling the notion that millennials might drive less. U.S. Federal Reserve Bank economists are finding that millennials have the same consumption preferences as past generations, including interest in buying cars, but are less well off than members of previous generations. Some U.S. cities are also finding that use of ride hailing services can potentially increase VMT, rather than lowering it. These latest trends suggest that wild predictions that global oil demand would peak by 2020 will likely be off the mark. Still, the possibility that oil demand will plateau or even decline in the long run cannot be dismissed out of hand. That’s because in multiple sectors – across vehicles, manufacturing, freight and even plastics – digital technologies are transforming the way things are made, shipped and used, with large disruptions to current use patterns possible. Last summer, Citi published a report suggesting countries across the globe are beginning to strengthen restrictions on single use plastics, noting that China’s decision to stop imports of plastic waste last year. “With China no longer importing plastic waste and other countries unable to absorb the high level of supply, exporters will likely be forced to expand on domestic recycling infrastructure and/or cut back on the level of waste being produced,” Citi noted in its report. McKinsey & Co. estimates that recycling and substitution of biomaterials could shave 2.5 million b/d off rising oil demand for plastics manufacturing by 2035 and that 60 percent of plastics used by 2050 could come from production based on previously used plastic. Changes in global trade and freight practices could also substantially lower oil use in the future. In its “Less Globalization” scenario, BP projects that the rise in global economic expansion would lag about 6 percent, compared with a business as usual projection for 2040, translating into about a 2 percent loss of oil demand, if tariff wars and rising populism were to continue to dent global trade. That estimate for a minimal effect on oil use could prove optimistic, since next generation manufacturing technologies, increased use of optimization programs for logistics, increased use of alternative fuels in trucks and delivery vehicles and rising protectionism for jobs could mean bring much larger changes in oil use for aviation, shipping and on-road freight. Our modeling, in partnership with University of California Davis researchers, indicates that there are still many policy levers that could change the trajectory for oil use in transportation. We found, for example, that the possibility that proposed bans on new sales of internal combustion engine cars by 2040, mooted in Europe and even discussed in China and India, could shave 5 million b/d from future oil demand, if implemented broadly. In one scenario, utilizing the International Energy Agency’s mobility model, we defined the parameters of an internal combustion engine (ICE) sales ban policy as one where non-plugin, ICE-powered new vehicle sales go to zero in Europe, China, India and California by 2040. Plug-in hybrids are assumed to be exempt from the sales ban, as well as commercial freight vehicles, emergency vehicles, and 2/3 wheelers. Closing geo-fenced areas of major global cities to gasoline-powered cars, potentially in favor of electric vehicle ride sharing or greater use of public transit, could double this effect, our research concludes. New policies that promote use of alternative fuels for buses and in on-road trucking, a policy already underway in China, would also curb growth in oil use significantly. The bottom line is that a combination of rapid technological disruption and shifting geopolitics has the potential to adjust the trajectory for oil demand, potentially downwards, but also, without strong policy intervention, possibly upwards. That is creating great uncertainty for investment in the oil sector. Historically, investors have favored oil company shares and oil commodity financial derivatives because they felt that the sector would face future scarcity of both produced supplies and physical reserves. This view of peak oil supply propelled billions of dollars in capital investment in search of new reserves. Oil company reserve replacement was highly valued and rewarded. Now this presumption that oil demand could only flow one way – upward – is more uncertain and notions of long run oil scarcity look more doubtful as the industry unlocks the technical ability to produce more oil and gas from “source” rock, rather than from large already discovered reservoirs. These two new realities are not fantastical “perceptions.” They are the outcome of new uncertainties created by rapidly accelerating changes in technology. As shareholders pressure international oil companies (IOCs), they are increasingly positioning themselves to respond. A recent Wood Mackensie consultants report suggests that renewables could represent one fifth of total capital allocation for the major oil companies most active in the alternatives sector after 2030. That should be a cautionary note for national oil companies (NOCs) thinking that the oil majors can be the financing backup plan if their own attempts to expand (or possibly just to maintain) oil production capacity fail in the next few years. Increasingly, the majors will judge possible long-range mega-projects with a tougher eye, now that booking large reserves is not currently rewarded as it once was by Wall Street. That could create future difficulties for countries like Venezuela that are counting on foreign direct investment to bail it out of mismanagement of its oil sector. Thus, Mr. Nasser may be correct. Oil supply could prove volatile in the coming years (or even in the next few months) as national oil companies face increasing problems. But that problem won’t likely be tied to misperceptions by the shareholders of the IOCs. It is more likely to be related to how Saudi Aramco and its peers manage their current revenues and future investments.

Back in 2013, Venezuelan state oil company PDVSA had ambitious plans for expansion of its oil production capacity. Its leaders envisioned eight new projects in the Orinoco Belt region that would require $108.3 billion in new investment to increase production to 4 million barrels a day (b/d), according to the state firm’s business plan covering 2013 to 2019. At the time, to facilitate this rise in production, capacity expansions for the heavy oil upgraders needed to convert the tar-like Orinoco extra heavy oil to a lighter mixture for transportation and refining was estimated at $23 billion. Today, the four heavy crude upgraders installed in the 1990s and operated with minority partners, Total/Equinor, Chevron, and Rosneft, have an official nameplate capacity to process 700,000 b/d of Orinoco oil. In reality, output from the upgraders has been running below that level. For example, the Petrocedeno upgrader, where Total and Equinor are minority partners, was closed temporarily in early February due to mechanical problems with a pipeline and pump. PDVSA’s Petro San Felix upgrader, expropriated by the state firm from ConocoPhillips in 2007, has been out of service for months. In the same Orinoco region, a fire last week at a crude oil pumping station interrupted the transportation of oil from the Petrocarabobo oil field, a joint venture between PDVSA and Repsol, and from Petroindependencia, which Chevron is a partner. Gasoline supplies are also expected to sink as currently arriving international shipments made by oil traders prior to recent U.S. sanctions start to dry up. Venezuela is also having trouble finding new buyers for its crude oil exports that were previously going to the United States. India, which is purchasing about 360,000 b/d now, faces refining constraints and is therefore unlikely to be able to process much additional oil from Venezuela. PDVSA only has storage for 44 million barrels, a little more than roughly one full month of production at current output, so continued marketing problems could affect production rates. The longer the situation goes unresolved, the more Venezuela’s production is likely to fall, potentially leaving exports at close to zero. Why it matters? The oil situation does not bode well for a smooth financial transition, even if the current political stalemate in Venezuela comes to a peaceful end. In the latest development, Juan Guaido called on his supporters to surround Venezuela’s military bases and peacefully demand “the entry of humanitarian aid.” It will be tempting for Washington policy makers to assume revitalization of the oil sector will help Venezuela dig out from its current economic woes under a Guaido-led transition, followed by democratic elections, but that process could be a drawn out one. Presumably, before it can bring in new investment by other companies, the interim government will need to organize new elections. The next government then will need to pass a new constitution to be followed by a revised hydrocarbon law that can be the cornerstone to new foreign investment. It is possible that companies currently still operating in the Orinoco Belt could extend their existing contracts to inject more investment, but that presumes those players will be willing to sink more money into the country where they already have high exposure and political risk. It is unclear if China, which is still owed $20 billion by Caracas, will be willing to add even more oil investments in the country under a new government that might have stronger links to the United States. What’s Venezuela’s best-case oil scenario? In 1992 when Venezuela announced it would open its oil sector to foreign investment for the first time since 1976 when it nationalized its oil industry, the line of firms interested in investing was long. Thirty- three companies signed service agreements to develop Venezuelan oil and gas fields in exchange for a fixed fee for service, including ExxonMobil, Shell, BP, Equinor (then Statoil), Total, Repsol YPF, China National Petroleum Corp. (CNPC). ExxonMobil and ConocoPhillips also negotiated profit sharing agreements for newer fields such as La Ceiba and the Coronoco field, respectively. In addition, four consortia formed extra heavy oil upgrading associations to exploit the prolific Orinoco Belt. But even if Venezuela manages to shift its government and reinvigorate its national hydrocarbon law to attract new foreign direct investment, it will have a harder time than during the 1992 Apertura Petrolera initiative. That’s because the North American shale revolution and the advent of electric cars has dispelled the notion of resource scarcity that drove massive capital investment in search of new oil reserves in the early 1990s. Many international oil companies are less interested in amassing large reserves that take many years to develop and might become stranded assets that won’t be needed in twenty or thirty years. Companies estimate that it would take three years for international corporations that still have ongoing oil production joint venture contracts to expand their operations, mostly in the Orinoco region, to add 1 to 1.5 million b/d to oil production levels, now at 1 million b/d and falling. The Western Maracaibo Basin, where PDVSA produced 1.5 million b/d back in 2002 from three main fields – Bachaquero, Lagunillas, and Tia Juana- suffered natural field declines of roughly 25 percent in recent years and are mainly shutdown. PDVSA used to spend $3 billion to $4 billion a year just to arrest wellhead declines in mature fields but has failed to make needed repairs and maintenance of its fields in recent years. Younger fields in Venezuela’s Eastern Basin, such as El Furrial and Santa Barbara, which used to produce 1.8 million b/d prior to the election of Hugo Chavez, have suffered from underinvestment and have sustained reservoir damage.  Implications for U.S. Policy If restoring oil revenues could be a lengthy process, the United States, together with the International Monetary Fund and other regional countries, are going to need to fashion other strategies to finance humanitarian assistance to Venezuela. Any recovery strategy is going to need to consider structural economic reforms, coupled with generous international financial assistance for food, medicines and other badly needed humanitarian aid, and a revitalization of the Venezuelan private sector. Loose talk that Venezuela has “large” oil reserves that can collateralize the country’s future will do disservice to the Venezuelan people who need to rebuild their country by utilizing a broader economic base to prevent another resource curse disaster in the future.

Congress is considering a bill that could punish countries for artificially boosting oil prices. What could that mean for warming ties between Russia and Saudi Arabia?

In early 2003, when debate was surfacing in the United States whether to invade Iraq, a Council on Foreign Relations working group drafted a monograph outlining the problems that such a policy would face. As I explained at the time as part of that effort, Iraq’s oil industry was in tatters and it would take years, not months, to restore it. It was clear prior to the 2003 war that Iraq’s oil could neither pay for the war, nor be nearly enough to fund its reconstruction. Given the news that the United States has recognized the speaker of the democratically elected National Assembly Juan Guaido as interim President of Venezuela in defiance of ruling strongman Nicolas Maduro, the question about how long it would take Venezuela to restore its oil production under a new government is likely to arise. Like Iraq, Venezuela will need massive amounts of money to rebuild deteriorated national infrastructure. Also like Iraq, Venezuela’s oil industry has suffered serious damage, and the damage could arguably be harder to restore than in Iraq. The invasion of Iraq took place in 2003. Iraq’s oil production is now gaining ground, but that positive trajectory took almost a decade to establish, as seen in figure 1.  It might seem relevant to note that Iraq faced a destructive war in 2003, followed by years of civil war and more recently, a battle to expunge ISIS and therefore its oil installations took a military beating that won’t be analogous in Venezuela. That is certainly true. But the fact is that there has been tremendous violence on the ground in Venezuela with multiple armed groups looting and raiding the country’s key infrastructure, and the oil sector has been targeted across the country. The violence has caused many of the international oil companies previously operating in the country to withdraw. One challenge that will face any new government, were one to be able to emerge, is that there are multiple renegade armed groups operating inside Venezuela, including Cuban mercenaries and others deeply entrenched in drug trafficking. This has made and will continue to make guarding Venezuela’s oil industry a major challenge. Further complicating any oil sector transition, the Venezuelan military has virtually taken over as the gate keeper on the operation of the oil industry. The employment ranks of state firm PDVSA is said to now total as many as one hundred and sixty thousand people, up from its normal ranks of forty thousand in the years prior to the election of Hugo Chavez. Organizations like the Military Corporation for Mining, Petroleum and Gas Industries (Camimpeg) created in 2016 actively intercept the flow of income from the oil sector. Camimpeg’s soldiers have been working to suppress strikes by oil workers unions at oil fields around Lake Maracaibo, and Petroleum Intelligence Weekly is reporting that soldiers often siphon off barrels and engage in illegal smuggling for payments for stolen oil being included at Venezuela’s ports in larger shipments to Russia and China. Last week Guaido bravely told a public rally that “We will not permit the continued use of public funds by a gang of thieves so they can continue stealing,” but acknowledged that gaining control of Venezuela’s offshore assets like Citgo Petroleum in the United States would take time. In fact, Guaido’s opposition government will need time to develop the leadership and capable administrative staffing that it would require to run an industry as technically complex as oil and gas.   The condition of Venezuela’s oil industry is dire. Of its four refineries, only one is running. Fires, explosions, looting and mis-operation has shuttered most of Venezuela’s refining capacity. Refining throughput is estimated at just under three hundred and fifty thousand barrels per day (b/d), mainly from the large Amuay Bay facilities, compared to its prior operational capacity of 1.5 million b/d. The Cardon, El Palito and Puerto La Cruz facilities face equipment failures and manpower shortages. PDVSA has also abandoned the Isla refinery on the Dutch Island of Curacao, which it had operated under a lease. The refining problems have led to gasoline and diesel shortages across Venezuela. Venezuela has experienced a sharp oil production decline over the past two years, dropping from 2.2 million b/d in early 2017 to about 1.1 million b/d currently, as is seen in figure 2. The declines result from chronic technical mismanagement and underinvestment in the sector over a decade or more and massive arrears to suppliers such as international drilling companies and equipment suppliers who have slowed activity in Venezuela over the past year or so to limit unpaid bills. Other more recent problems are also taking their toll, including shortages of basic equipment, logistical problems on export loading ports, corruption, and labor unrest, worker desertions, and mass resignations. Historically, Venezuela’s conventional fields near Lake Maracaibo have required constant intervention because their natural decline rate is among the highest in the world at 25 percent. Venezuela’s heavy oil extraction operations are labor and equipment intensive and requires cash purchases of diluent on the international market. Estimates are that it would take an injection of over $20 billion of new investment to reverse the current downward path on production. Given this cost, the extent of existing damage, and the deterioration of PDVSA’s workforce, a reversal of Venezuela’s oil industry woes might prove more difficult even than war-torn Iraq.      The United States had previously banned U.S. entities from trading in new Venezuelan government debt beyond the thirty days customary for letters of credit for oil trade. U.S. entities were similarly banned from trading in existing debt held by the Venezuelan government as well as trading in new debt instruments with maturity beyond ninety days. Citgo, as a U.S. entity, was forbidden to make financial distributions back to Venezuela. Last week, U.S. National Security Advisor John Bolton reiterated the Trump administration goal to disconnect “the illegitimate Maduro regime from the sources of its revenue.” With the U.S. recognition of Guiado as interim President of Venezuela, one option will be to establish a special purpose bank account for the opposition government in the United States, to include revenues that involve payments by American firms involved in business dealings in Venezuela. U.S. refiner Valero has been a major importer of Venezuelan crude, and Chevron Corporation has ongoing oil field operations in the country. The U.S. Department of State has already served notice to the U.S. Federal Reserve to recognize Guaido as the primary agent for access to Venezuelan financial assets in U.S. banks.  The practicalities of implementation remain to be seen. There is speculation that Venezuela will stop shipping any oil to the U.S. including to Citgo to avoid transfer of any funds to the Guaido-led interim government. That means in effect the current U.S. actions have already in effect embargoed imported Venezuelan crude to Citgo and other U.S. buyers. In a sign that Maduro regime is already taking a different approach, state PDVSA issued a tender early last week for the open market sale of four million barrels of Venezuelan crude oil slated for delivery in late January and into February. Black market sales of oil and refined products either by truck or otherwise have been a staple of declining oil regimes over the last few decades, and could possibly sustain Maduro with some cash even if his regime has difficulty maintaining official government exports. The situation with Citgo Petroleum is also a sticky problem with the Trump Administration. The wholly Venezuelan owned U.S. refiner also imports crude oil from Venezuela and purchases Canadian and other crude oil for its three refineries. Citgo is among the largest U.S. branded gasoline marketer in the United States. Citgo’s refineries produce roughly 4 percent of U.S. refined petroleum products. At its peak, Citgo supplied close to 9 percent of annual sales of U.S. retail gasoline. The firm is a major supplier to the Chicago area. Prior to the recent political events, investors who hold Venezuela’s unpaid bonds in Citgo had been organizing and were expected to push for a restructuring. Canadian miner Crystallex won a legal judgement against Venezuela last year that would have facilitated it to seize and sell Citgo as compensation for Venezuela’s 2007 nationalization of a gold mine. Venezuela still has $1.5 billion in settlement payments to make to ConocoPhillips as part of its 2007 nationalization of the American oil company’s assets in Venezuela’s oil sector. It is unclear how the unraveling of Citgo’s financial structure would proceed under a new Venezuelan government. Guaido has specifically announced plans to create a new board for Citgo but has been mum on how it might restructure the liens against the company’s assets and revenues. In 2016, Caracas used a 50.1 percent stake in Citgo as collateral for new bonds. Russian state oil firm Rosneft also has a $1.5 billion lien on the other 49.9 percent share of Citgo. Additionally, Venezuela remains highly indebted to China, which extended over $60 billion in aid during the rule of Hugo Chavez. To date, Venezuela has been repaying this latter debt slowly over time in the form of oil shipments. Geopolitically, the oil situation in Venezuela presents a difficult and complex challenge for U.S. diplomatic and treasury officials. On the one hand, the United States is helped by the fact that the Organization of American States (OAS) issued a resolution declaring Nicolas Maduro’s January 10 reelection “illegimate.” The United States has been leaning on allies and the United Nations to address the humanitarian emergency that has been created by the exodus of several million Venezuelans to neighboring countries. But China and Russia, which have invested heavily in the Maduro regime, are likely to push back on efforts to topple it, arguing at the U.N. Security Council that wider intervention is interfering with sovereign internal affairs. Both countries are heavily embedded in the Venezuelan oil sector.   Given the complexities of how Venezuela has tried to insulate itself over the years from U.S. pressure using friendly oil investors as leverage, it will be tricky for the Trump administration to proceed to back a Guaido presidency without creating a disruption in Venezuelan oil production and exports as an unintended result. Presumably, a new government would be in a position to receive some debt forgiveness combined with a broad restructuring of its government debt. In doing so, the demands of Russia and China will have to be factored in to ensure a lasting resolution of Venezuela’s indebtedness. The obvious importance of Citgo inside the U.S. refining system and as a key preserved asset for Venezuela should give pause to all parties about the relative stakes of failing to find a creative diplomatic solution to the current stand-off. Implementation of a political transition on the ground inside Venezuela, given the multitude of rogue military gangs operating within the country, may still make geopolitical deal-making just the tip of an iceberg for restoring stability to either the country and to its oil industry.  

Mohammed Barkindo, Secretary General of the Organization of Petroleum Exporting Countries (OPEC), is worried about the U.S.-China trade war. Even though oil prices seem to be stabilizing, Barkindo told CNBC News that OPEC was “concerned about the lingering trade disputes.” Last week, it was reported that China’s car sales fell by 6 percent in 2018, the first annual decline seen in more than twenty years, amid signs that China’s economy could be slowing down and consumer sentiment turning more pessimistic. Chinese oil demand, which represents over 12 percent of total world demand, is a linchpin to global oil markets. When China’s economy slows significantly, the effect on oil prices can be dramatic, potentially leading to single digit prices, which has happened in the past. Typically, an economic slowdown in China has historically sent shockwaves through the rest of Asia, weakening oil demand across the region. Oil traders, OPEC, and just about everyone else is hoping that Beijing’s planned stimulus will be sufficient to turn trends around, staving off what is feared to become broader global recessionary pressure. But this time around, the situation is more complex than what a Chinese stimulus could be able to address. Larger, more geopolitical issues are looming. These geopolitical factors will be harder to resolve and could easily become structural. Bruce Jones of Brookings argues that U.S.-China relations are at a turning point which he defines as the “closing of an era of expanding cooperation.” Jones argues that President Xi Jinping’s more assertive global and military strategy, combined with his crackdown on domestic dissent and internment of Xiajiang Muslims, is prompting a reevaluation of China, not only by the Trump administration but by a larger cross section of American political leaders, academia and business leaders. The previous American assumption that the deepening of commercial, diplomatic and cultural ties between the United States and China would transform China into a status quo power and liberalize China’s internal political development is now being seriously questioned. China’s flirtation with consumerism has not produced a society trending to openness and its nascent local environmental movement has not spurred on democratic principles, as previously supposed. Rather, what was ten years ago a decentralizing political culture has snapped back to central authoritarian rule revolving around a strongman leader who has removed term limits for his post. In a sign that progress on trade issues is not moving in the right direction, the U.S. Department of State and Canada’s Foreign Ministry recently issued a travel warning for China due to arbitrary enforcement of local laws and possible special restrictions on U.S.-Chinese dual nationals. The warning comes in the wake of the arrest of Meng Wanzhou, the chief financial officer of the giant Chinese tech firm Huawei, in Canada, at the request of the United States. The Chinese firm, China’s largest telecom equipment maker, has been under U.S. investigation for alleged violations of American trade control laws with Iran. China issued a similar warning to some of its state-run companies to avoid business trips to the United States, Britain, Canada, Australia and New Zealand.     The arrest of Meng Wanzhou is just a small part of a larger policy afoot to rein in China’s voracious appetite for sensitive American technologies. The Trump administration is giving high priority to the U.S. national security implications of China’s push into artificial intelligence, automation, and information technology as well as Beijing’s willingness to gain sensitive U.S. technology by a variety of means, including outright intellectual property theft. Last year, the Trump administration blocked Broadcom, the Singapore-based chip maker, from taking over American firm Qualcom, citing Broadcom’s relationship with foreign entities such as Huawei. The U.S. Commerce Department also banned Chinese telecommunications equipment firm ZTE from using U.S. components amid accusations that the Chinese firm had violated U.S. sanctions against Iran and North Korea. The ban was lifted after ZTE paid a hefty fine, replaced its leadership and agreed to U.S. compliance inspections.  But the U.S. administration’s views on U.S.-China trade are wider than the specifics of telecommunications technologies like 5-G. At issue is a broader view on the security of globalized supply chains. Some louder voices inside the administration’s internal U.S. trade policy debate argue that the United States should shrink dependence on China for U.S. and global supply chains. They argue that China’s massive Belt and Road Infrastructure Initiative (BRI) and its industrial policy, China 2025, could threaten the U.S. ability to maintain reliable and cost competitive cross border trade on which the U.S. economy and the military rely. Disruption to U.S. international supply chains could have serious consequences for the U.S. economy, jobs and the competitiveness for U.S. companies, for example, as became apparent for businesses that relied on components produced in Fukushima, Japan when it was hit by a tsunami back in 2011. The U.S. military is also vulnerable to supply chain disruptions involving materials and products from China, especially strategic minerals. Conservatives are starting to beat the drums regarding these risks. China’s BRI has proven an effective mechanism to get Beijing preferential access to investments in ports and other transportation infrastructure. Almost 70 percent of global container traffic flows through Chinese owned or Chinese invested ports, according to a survey by the Financial Times.  But China’s investment in logistics businesses include more than sea ports and warehouses. It also covers energy infrastructure and pipelines, trucking, railways, airports, and shipbuilding. The United States has been forced to respond with an infrastructure fund of its own, despite President Trump’s previous distaste for foreign aid programs. But it is unclear if the U.S. will be able to counter the pernicious financial devastation that can be wrought when a major Chinese infrastructure project goes badly in the developing world, especially in oil for loan deals in Latin America and Africa. It is important to understand this wider context when evaluating how U.S.-Chinese trade negotiations could progress in the coming weeks. Temporary hiatus in conflicts has been seen as good news for oil exporters but it could belie larger problems ahead. If the United States is thinking about how to dismantle its reliance on Chinese supply chains, it is safe to assume Chinese strategists are doing the same. That’s bad news for American oil and gas firms that were counting on China as a steady customer for rising exports. China’s imports of U.S. crude oil averaged 377,000 barrels a day (b/d) in the first seven months of 2018 but were zero by September of last year. That’s out of over 2 million b/d of total U.S. crude oil exports and 9.6 million b/d of Chinese imports. U.S. sales of liquefied natural gas were only 4 percent of China’s total 1.53 million tons of LNG imported in 2017, but tellingly, were the third largest market for U.S. sellers. Going forward, U.S. oil and gas exporters alike were expecting their sales to China to be much higher. Access to the Chinese market was also considered critical for the success of future natural gas export projects in terms of financing and end-demand. Lingering uncertainties about U.S.-China trade issues are making it harder for American LNG export promoters to push forward credible deals to beat out Qatari and Russian gas sales ahead of looming multi-year contract renewals. It’s not just the threat of more tariffs that could plague U.S. industry in the future or even the slowdown in Chinese demand for oil and gas more generally, though these would be a problem for U.S. producers as well. It is also that the rougher the U.S.-China divorce over technology supply chains and logistics infrastructure, the less likely China will feel comfortable relying on American oil and gas supplies. The days when U.S. and Canadian energy to China could have seemed like among the most secure sources could well be over, at least for now, reducing the value to Chinese firms of a 5 year or 10 year contract with an American firm, even if backed with an invitation for an upstream or export facility equity investment. A temporary truce in the trade war could produce an immediate home for some U.S. spot cargoes in China, but it’s going to be hard to inspire confidence for lengthier contractual commitments.  American oil and gas will have to shift to other markets. At first glance, this could seem like good news for Russia or Saudi Arabia who will have an easier time selling energy to China. But the longer process of dismantling of intensive trade links between the United States and China could eventually produce major headwinds to both the U.S. and Chinese economies. As markets start to wake up to such risks, it will be harder for the price of oil to rally, even with supply cutbacks. OPEC Secretary General Barkindo expressed "cautious optimism" on U.S.-China trade disputes being favorably dispensed because both countries “want to see these issues resolved.” But chances are it will be a long, drawn-out process of recalibration.

Samir Saran is the President of the Observer Research Foundation. Aparajit Pandey is the Program Director for Climate, Energy, and Resources Program at the Oberver Research Foundation. As leaders gather in Katowice, Poland, for the Twenty-Fourth Conference of the Parties (COP24) to the United Nations Framework Convention on Climate Change, the possibility that India can shift to a new low-carbon growth model is a critical test for a global pact on climate change mitigation. India will be one of the first countries to transition from low- to high-income economy in a fossil fuel–constrained world. While American leadership reneges on its climate finance commitments towards the global community, India is taking a lead to develop its economy largely through its own political and financial arrangements. Done correctly, the method and mechanics of India’s low-carbon transition can provide a replicable template for energy development across the world—especially for mitigating carbon emissions, ensuring affordable energy access for all, and eradicating poverty. A study of India also provides assessments and recommendations that can inform development efforts in Africa, Latin America, and Southeast Asia. In the space of two years, India’s solar and wind energy prices have fallen dramatically, undercutting average coal prices by approximately 25 percent. At the same time, investments in clean energy projects have risen rapidly, with $42 billion flowing into Indian renewable energy projects over the past four years. These optimistic figures, however, should not hide the fact that the lower rates charged by renewable energy power producers are predicated upon two volatile factors: the price of materials and government policies. Prices of renewable energy components are vulnerable to shifts in trade policy, currency depreciation, or changes in supply and demand. Moreover, with renewable power prices dropping, both central and state governments are reassessing the need for the limited incentives and subsidies they provide. In India, the resulting clean energy sector optimism over the past few years has skirted over some serious fissures in the foundations of the architecture. Firstly, India’s public power distribution companies (DISCOMS) remain a gordian knot that the government has not been able to untangle. The issues with DISCOMS remain related to three distinct factors: poor pricing models due to political interests, weak corporate governance, and ailing infrastructure. Any measure to reform the sector needs to account for all three factors. Secondly, India’s energy sector suffers from a lack of developed local financial markets. Debt-financing options for renewable energy projects remain limited within India because the shorter terms of saving instruments inhibit long-term domestic bank loans. Under normal circumstances, this asset and liability mismatch can be bypassed through alternative debt instruments. Use of financial vehicles such as bonds or infrastructure investment funds, however, remains limited in Indian and other emerging markets. The loans that have been given out to the clean energy sector have largely been driven by short-term macroeconomic factors such as excess capital liquidity (a byproduct of India’s 2016 demonetization reform). As the Indian banking sector hovers on the precipice of a crisis, it is likely that domestic debt financing for these projects will quickly dry up. Finally, the risk premium that international commercial banks charge for operating in emerging economies such as India remains an unsurpassable barrier. ReNew Power, India’s largest renewable energy company, raised a $450 million bond issuance in 2017. But the bond was several levels below what was considered an investment grade rating, despite ReNew’s excellent business fundamentals and backing from Goldman Sachs, the Abu Dhabi Investment Authority, and the Green Environment Fund. Since the issuance of the bond, the firm has grown exponentially, cementing its place as one of India’s premier energy producers—demonstrating that projects and companies could be evaluated more independently of sovereign ratings.  We recommend that India reform power grids by implementing hybrid public-private systems. The Indian state of Gujarat is the exception to the country’s DISCOM issues, with all four of the state’s utilities currently showing profits. Gujarat’s path could be a model for other parts of the developing world. On financing, direct economic interventions designed to bolster debt financing are not always viable. To increase the availability of debt financing for clean energy projects in emerging markets, policymakers can encourage the creation of alternative debt vehicles. “Green” asset backed securities are one such alternative. Securitized debt has been a largely overlooked financial instrument outside of the developed world, but recent reforms have shown the potential of the asset class in emerging markets. By compiling renewable energy assets that come from different companies and geographies at various points in their operational lifecycles, banks and other financial institutions can dilute many of the risks associated with individual renewable energy projects. To further mitigate risk through diversification and bolster the credit rating of a securitized instrument, the financial creator of the asset can also add a tranche of non-green assets. The proceeds from selling the security can then be used to finance new projects, which can in turn be securitized themselves, creating a virtuous cycle. Another alternative to traditional debt could be developed through the creation of “green” investment banks (GIBs). GIBs are government-funded entities that “crowd in” private investment in low-carbon assets and operate like a normal investment bank, albeit with a sectoral bias. They can provide debt for projects with existing capital reserves and raise funds through the issuance of bonds and creation of asset-backed securities. They can also invest as equity partners, developing projects and conducting due diligence, if needed. The value of GIBs comes from their flexibility and ability to adapt to market conditions and trends. Moreover, GIBs have sectoral experts whose skillsets allow them to understand public- and private-sector dynamics and deal with a variety of transactions. Finally, Basel IV, the proposed reforms for the global banking regulatory framework, should include climate change in its assessment criteria—either by measuring the exposure of a bank’s portfolio to climate change–related damage or by implementing a green factor on the weighting of risk for renewable energy projects. The significance of India’s development choices should not be underestimated. If the success of the Millennium Development Goals was predicated on China’s economic rise, India’s capability to replicate the same in a carbon-scarce world will determine the fate of the UN Sustainable Development Goals. This blog is excerpted from the Council of Councils Global Governance Working paper, “India and the World: Fueling a New Low-Carbon Growth Model.” Read the full paper here.

The Organization of Petroleum Exporting Countries (OPEC) decision to cut oil production by 1.2 million barrels a day (b/d), together with Russia and a few other non-OPEC producers, may have garnered the organization’s members a few extra dollars temporarily, but it belies larger problems ahead for the 57 year old cartel. OPEC has weathered many geopolitical and economic challenges in the past, not the least of which was surviving land wars between countries in its membership and multiple crashes of oil prices below $10 a barrel. But, like many things changing in the current world order, OPEC’s mission is starting to look increasingly anachronistic and events swirling around the meeting last week in Vienna foreshadow conditions that might require more introspection than the organization or its members will be able to muster. The United States’ response to OPEC may also seem effective in staving a rise in oil prices this autumn, but Washington also needs to give further examination to its long run strategy regarding the cartel. Two of the big side disruptions at OPEC’s latest December gathering was the appearance of Brian Hook, Special Representative for Iran and Senior Policy Advisor to the Secretary of State at the U.S. Department of State, at the sidelines of the meeting and Qatar’s surprise announcement it would be quitting the organization. Mr. Hook confirmed to reporters just ahead of the OPEC meeting that the U.S. had to grant waivers to Iranian oil sanctions “to ensure we did not increase the price of oil.” The envoy said ahead of the OPEC meeting that he expected a “much better-supplied oil market” in 2019, when he said the U.S. would be in a “better position to accelerate the path to zero [Iranian Oil Exports].” The role of the United States in choosing the pace at which to eliminate Iranian oil from the market explicitly based on oil prices raises all kinds of thorny problems both for OPEC and for U.S. policy makers.  U.S. sanctions on Iran and any waivers were clearly a factor OPEC has had to consider in forecasting global oil market supply, but the appearance of Mr. Hook at the sidelines of the OPEC meeting in Vienna last week was problematical because it implied, perhaps accidentally, a level of coordination that goes beyond just jawboning allied oil producers to put out more oil to replace Iranian barrels. The controversy surrounding Mr. Hook’s visit to Vienna calls attention to the age-old question that has plagued OPEC in recent years: what oil price should be considered too high or too low? One might have thought that issue would have been front and center in OPEC’s recent deliberations. As prices rose to $86 in October, the ramifications for emerging market economies looked dire. U.S. President Donald Trump took to twitter and both publicly and privately the U.S. made the point that oil prices above $65 would be problematic for the global economy. There seemed to be evidence to that view as economic growth and oil demand appeared to falter in the months when oil prices were climbing. Earlier this year, Saudi Arabia indicated that oil prices of $70 to $80 might be more to its liking, begging the question whether the kingdom’s own economic pressures would prompt it to view the world’s ability to absorb higher oil prices too optimistically. OPEC has used the vocabulary that it is just trying to “stabilize” oil prices or “balance” the market but those terms are meaningless without a reference to a price range at which that stability would be defined. Certainly, OPEC and Saudi Arabia specifically, can ill-afford pushing oil prices up to costs that would harm the health of the global economy and thereby crater oil demand more extensively. In that regard, the United States and Saudi Arabia should be seeing eye to eye. Moderate oil prices seem to be in OPEC’s long run interests, not only to avoid a massive drop in oil demand, like the one seen in 2009 during the world financial crisis, or like in 1998 from the Asian flu, but also to stave off the acceleration of competing technologies that might someday bring about a peak in global oil demand.  The higher the oil price now, the more unconventional oil and gas is likely to leave U.S. shores in the coming years, and the more large logistics companies and others will shift to optimization technologies that will limit oil use. There is also the bevy of alternative transport fuels waiting in the wings for the new oil price spike, including electric batteries, natural gas and hydrogen.   The very concept that these alternative technologies exist has changed the politics of U.S. oil-for-security alliances from within U.S. domestic political leadership circles. U.S. Democrats are far more vociferously questioning the usefulness of the U.S.-Saudi alliance these days. Importantly, Democrats are still highly committed to the clean energy transition so any arguments that Saudi Arabia is an important U.S. ally on oil prices falls on deaf ears. Oil price volatility is a defacto raison d’etre to support electric vehicles and the full left-wing agenda on clean tech. Thus, President Trump’s rhetorical comment that a failure to resolve U.S.-Saudi differences constructively could lead to $150 oil fails to stimulate concerns. High oil prices promoted by OPEC would undoubtedly hasten the clean tech revolution while at the same time stimulating U.S. jobs in the shale industry. If U.S. motorists don’t agree, the U.S. Congress has a piece of legislation to sell that would authorize the U.S. attorney to file anti-trust charges against OPEC for manipulating oil prices. That legislation weighed into OPEC’s deliberations in Vienna and might be one reason Qatar has chosen to quit the organization since passage of the legislation could affect U.S. infrastructure assets such as LNG export terminals and refineries owned by OPEC members. In early October, Qatar’s current energy minister told the press that peak oil demand was real and that the world was “pushing oil away as much as possible.” Other OPEC countries have expressed similar concerns privately, pitting them against fellow members who might favor policies that produce short term revenues. As Democratic leaders have been suggesting, there is a coming wave of energy innovation that could mean Saudi Arabia will play less of a role in changing global energy markets. The Saudi leadership is well aware of this existential problem and it is likely one of the reasons its role in global affairs has become more erratic. But while these technological gains are transforming global energy markets, they are not a spigot. Their exploitation requires the investment decisions of dozens of independent private companies who are following market signals and government incentives that have been unsteady of late. The gradual nature of the digital energy transformation means that temporary events, most recently the economic crisis in Venezuela and U.S. sanctions on Iranian oil, can give OPEC, and even Saudi Arabia on its own, substantial, albeit brief, market power. This proved an uncomfortable fact for U.S. President Donald Trump this fall and for the fragile global economy more generally. It is the reason the U.S. Congress is looking at legislation to defang OPEC. As the U.S. Congress debates various options, it should continue its policies supporting U.S. makers of electric cars especially because alternative engine technologies help wean the global economy off its reliance on OPEC oil more rapidly. As recent commodity price volatility and OPEC’s recent deliberations shows, that will take more than just exporting two or even three million barrels a day from U.S. shores given ongoing instability in many oil producing regions. In trade talks with China and European automakers, the Trump administration should shift to be a leading voice promoting advanced automotive technology, including for trucks, and adjust any proposed tariff rates accordingly to incentivize advance of new technologies. Congress should protect policies promoting advanced automobiles in the U.S. and consider stronger efficiency standards for delivery trucks and large freight vehicles. Congressional leaders should also press the Trump administration to quickly settle favorably with California on standards for diversified fueling options. The administration must give more weight to the fact that use of alternative fuels at home in cars and trucks (electricity, natural gas and biofuels) would free more U.S. oil for export to water down the importance of Saudi oil. It’s time to recognize that it is no longer wise to say the United States must back erratic actions of oil producing states because of their premiere role influencing global economic trends. More direct U.S. leadership to reduce the world’s vulnerability is needed, not only for one OPEC meeting, but for a more strategic future.