It may seem that the world is becoming a more dangerous place for energy. Geopolitical, military and revolutionary crises centre on oil and gas. The oil services giant Schlumberger now needs extra security in 20 countries, up from just two in 2001, as the Financial Times observed. Oil prices rose on the fighting in northern Iraq, then again on the news of the downing of the Malaysia Airlines flight in eastern Ukraine.
In Iraq and Syria, the “Islamic State” funds itself with looted oil. Libyan petroleum ports close and reopen in disputes over federalism and payments. Civil war in South Sudan threatens oilfields. Russia cuts gas to Ukraine as separatist fighting continues. Chinese and Vietnamese warships face off over a drilling rig in the South China Sea. Mexican drugs cartels siphon oil from pipelines and threaten to kidnap workers.
Yet despite these conflicts, the world has become a much safer place. From a peak during the 1980s, wars within and between states have dropped sharply since 1990. Even including the Syrian civil war, the death rate from political violence has fallen steadily since the 1970s. Oil price volatility has been exceptionally low over the past three years, and although prices remain high, there has not been a 1973 or 1979-style shock.
How do we resolve these contradictions?
Even in an overall more secure world, oil companies’ exposure to insecurity may have increased. Since the 1990s, higher energy prices, the depletion of traditional safe areas such as the North Sea and Alaska, and the entry of Asian companies seeking to carve out their own positions have led the industry into more risky territory. Chinese companies, which have come under attack in South Sudan and Ethiopia, have realised this.
At the same time, countries once largely inaccessible to international energy investment, such as Iraq, Libya, Afghanistan and Mexico, have opened up. The Middle East, the world’s most important oil-producing region, is passing through a period of political upheaval and conflict, even though lesser producers in Latin America and South East Asia have become more peaceful.
More recently, the North American shale oil and gas boom has opened up enormous resources in safe regions, changing US perceptions about energy security and helping to cap oil and gas price volatility.
Modern conflicts present new challenges to energy security. Ukraine and the South China Sea are hybrid conflicts – waged less by armies and warships than by online propagandists and fellow travellers, unofficial fighters and local proxies, saboteurs, fishing vessels, drilling rigs and economic weapons, including the cut-off of gas supplies and demands for debt payments.
Similarly, the West’s response to Iran’s nuclear programme, and to Russia over Ukraine, rests heavily on economic sanctions – halting Iranian oil exports and barring long-term financing to the Russian oil companies Rosneft and Novatek.
The activities of the Islamic State show how oil on a small scale is used to fund conflict and to deny revenues to government opponents. But in Iraq’s Kurdish region, Libya, South Sudan, Somaliland and Yemen’s Hadramaut, resource regionalism holds sway – petrodollars as the essential funding for new autonomous or independent entities.
The stand-off in the South China Sea shows that old-style, classic energy security – the military control of oilfields and shipping lanes – remains relevant, with echoes of 1914 as a rising power confronts the incumbent and its allies.
The direct physical effect of these conflicts may be limited to pipeline bombings and tanker hijackings. The major effect is longer-term – scaring off investors, distorting markets and so reducing global energy supplies and driving up their cost. Military methods are not enough – expanding and liberalising markets, conducting firm diplomacy, resolving conflicts and building strong, legitimate states must go together. Global energy security has become on the whole better and more robust – but also much more complicated.
Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis
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