Robin Mills: Why globalised energy markets are worth defending

The 1930s showed that globalisation can be reversed, splintering a multinational system. Short-sighted politicians could recreate that era's suspicion and conflict.

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In late 1941, faced with an embargo on oil and steel, a cornered Japan decided to fight. Japanese bombers crippled the US Pacific fleet at Pearl Harbor before seizing the oilfields of South-east Asia. Driven back from the gates of Moscow in the summer of 1942, Hitler's armies made a drive for the oil of Baku, an offensive that would end in cataclysmic defeat at Stalingrad.

Then in 1953, the US backed a coup to remove Iran’s popularly elected prime minister Mohammad Mossadegh, who had nationalised the Anglo-Iranian Oil Company, the forerunner of BP. The US imposed quotas limiting its imports of foreign oil, sparking the formation in 1960 of Opec. And until the mid-1970s, the “Seven Sisters” international oil companies dominated the industry, mostly moving their own production through their own refineries with opaque prices.

These events seem like a throwback to an earlier world of colonial empires and autarkic spheres of influence. But as the 1930s showed, globalisation can be reversed, splintering a multinational trading system into blocs.

Oil was among the earliest and most completely globalised industries (gas took longer). Oil was traded internationally almost from the start, as in 1892 Shell shipped Russian oil to the Far East then merged with Royal Dutch, whose fields were in what is now Indonesia.

This globalised market was near-perfected by Soviet gas pipelines to Europe in the 1970s; the 1991 collapse of the USSR itself, opening its petroleum to world markets; the ascent of China to the world’s biggest oil importer during the 21st century’s first decade; and in the past few years the extension of the liquefied natural gas industry led by first Qatar and most recently the US. One of the biggest energy market distortions was removed last year when the US decided to permit crude oil exports.

Beijing sought through the early 2000s to achieve “energy security” by purchasing hydrocarbon fields from Kazakhstan and Sudan to Colombia. But it later gained enough confidence in the international market to rely largely on normal imports and price benchmarks, although backed up with bilateral deals with select countries, notably Venezuela and Angola. It, and India, remain critically dependent on US-patrolled seaways in the Arabian Gulf and Indian Ocean.

Yet this year, antiglobalisation political forces have strengthened. Canada, Australia and the US have all restricted or rejected Chinese energy investment at various times. The probable collapse of American free trade deals with Europe and east Asia has been accompanied by China pushing its own regional pact. A climate-wrecking US may be faced with tariffs from environmentally conscious countries.

Some of today's technological trends also contribute to energy nationalism, as shale production has made North America largely self-sufficient in oil and gas. Rising shares of renewable energy, such as wind and solar power, will largely be consumed in the country, or at best the region, where they are produced.

Most serious is the rise of economically illiterate, far-right antitrade populists, most obviously the Brexiteers in the UK and Donald Trump in the US.

Their ideological complements are the strategic mercantilists, most notably in Beijing and Moscow. Russia has for some years preferred business on a bilateral basis, selling its gas with a heavy dose of politics, though oversupply and EU action has reduced its market power. The US is not immune from this temptation either, particularly in the energy sanctions imposed on Russia and Iran – a useful tool but prone to overuse by short-sighted politicians.

Despite the retreat to economic nationalism and regionalism, it is still too early to mourn the death of globalisation. The technological and institutional forces driving it are strong. But strangulation of the mainly free trade in energy would bring more poverty, suspicion and risk of conflict, not less.

Robin Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis