The new geopolitical economy of oil in the Americas

The recent collapse in oil prices is a mixed blessing: from the vantage point of the Caribbean the implications are perplexing and disturbing

Matthew BishopWhen I moved to Trinidad in 2009, a country blessed with a flourishing hydrocarbon industry, I marvelled at the fact that it cost barely £10 to fill my car with petrol.  But global oil prices were hovering around their peak of US$147 a barrel and my selfish joy was thrown into sharp relief by the angst of friends and family in the UK paying ten times as much at the pump.  It is under-remarked just how deeply personal experiences of energy prices are.  For every happy Brit arriving in Trinidad there are Venezuelans making a similar journey, aghast at what they perceive as high prices, used as they are to paying less than a dollar to fill their tanks, often tipping the attendant more than the cost of the petrol itself!

So, we must remember, as Tony Payne pointed out on these pages recently, that violent swings in commodity prices produce losers as well as winners.  In fact, it is hard to think of another setting in which the pendulum shifts so brutally and regularly to create new patterns of sudden loss and gain.

For Britain, its naked exposure to fluctuating oil prices was actually a major reason for the disproportionate impact of the financial crisis, something Colin Hay noted soon after they peaked.  It would be churlish, therefore, to begrudge a British public that has seen a vicious assault on living standards over the past few gruelling years a bit of relief as prices have fallen to under US$50 a barrel.

Yet I am also immersed in the frenzied debates in Trinidad, where recent budgets have been based on a global oil price of around US$85 a barrel, and the reaction is a contrasting one of sheer terror.  There has been a drastic overnight revision of government expenditure, including an immediate 15% cut in ministry budgets, and the beginning of a vicious circle where previously viable exploration and extraction projects come under threat, undermining future production capacity and therefore revenue potential.  All of this takes place amidst political recrimination, and familiar arguments about a country living beyond its means and failing to inoculate itself by diversifying its dependence on the energy sector.  Similar debates are surely taking place in Caracas, Moscow and Tehran, the capitals of the three countries generally perceived to have the most to lose at present.

This brings to mind the Queen’s famous comment about why nobody saw the 2008 crisis coming.  The fact is that global energy prices are inherently unstable and unpredictable, individual countries cannot easily influence them, and basing a budget on a price of US$85 a barrel actually seemed rather prudent when oil was being traded at well over US$100. This is particularly so, given that for much of the 2000s we were told that ‘peak oil’ was our greatest worry: that there wasn’t enough, and we would soon run out, with apocalyptic consequences along the way as a price of US$200 or more would become the norm.

As we now know, though, quite the opposite is the case.  An early indication of this came with the publication in 2012 of an explosive report by Leonardo Maugeri which argued that the investments flooding into unconventional oil production – and particularly US shale – would fundamentally transform the geopolitics of energy.  In short, we actually have too many hydrocarbons, and we cannot afford, environmentally-speaking, to burn more than a fraction of them.

From the vantage point of the Americas in general – and the Caribbean in particular – the brave new era which is now coming to pass heralds a range of significant and potentially threatening shifts.  Only yesterday, on 26 January, the US Vice-President Joe Biden hosted the first Caribbean Energy Security Summit in Washington DC to discuss issues relating to the governance and financing of the region’s long overdue shift to more sustainable forms of energy.  Many Caribbean countries are grappling with high debt burdens, stagnant growth and a protracted development crisis. Foreign exchange is scarce, so the imported energy on which most of them rely is disproportionately expensive and invariably dirty.

However, looming over what might have seemed a straightforward series of discussions when the meeting was first conceived are three confusing and contradictory structural issues.

First, there is the general collapse in global energy prices discussed above, which, having provoked consternation in Trinidad, which is the English-speaking Caribbean’s wealthiest country and its sole net energy exporter, has been enthusiastically welcomed elsewhere.  So, while cheaper oil will theoretically provide respite to budgets battered by the global crisis, over the longer term it will also reinforce dependence on imported fossil fuels and render transitions to cleaner energy even more difficult than they are already.

Second, there is the question of US energy independence.  Washington is currently walking a tightrope between capitalising on the fruits of a revitalised energy sector – even potentially relaxing the export ban on crude oil that has been in force since 1975 – and taking advantage of the current glut to realise its wider geopolitical ambitions of destabilising recalcitrant regimes in Russia and Iran.  But, if the cost of a barrel of oil remains too low for too long, it could decimate the financially fragile American shale production that brought about the collapse and allow the Gulf states once again to tighten their previously loosened grip on global energy markets.

Third, there is the thorny question of one particular rentier state closer to home (for me at least): namely, Venezuela.  Given the almost total dependence of the government on oil rents to finance what is an increasingly contested revolution, a painful dénouement seems ever more likely.  For the many small Caribbean countries that are reliant on Venezuelan largesse via its Petrocaribe oil assistance programme, the prospects are grim indeed in the event of its scaling-back.  They have generally built up unsustainable debts to Caracas and, even in a context of falling global prices, have insufficient dollars easily to buy oil from elsewhere.

In sum, the distributional consequences of changing energy prices are mediated by a plethora of highly complex, localised, political economies.  In other words, if soon you gleefully happen upon a garage forecourt advertising – at long last! – a litre of petrol for less than a pound, spare a thought for the many parts of the world that are on the cusp of some quite disturbing convulsions caused by the same phenomenon.