Hardly A Whisper Yet About The MASSIVE Restructuring Occurring In The Global Energy Market...,

bloomberg |  The world is on the cusp of a geopolitical reset. The global pandemic could well undermine international institutions, reinforce nationalism and spur de-globalization. But far-sighted leadership could also rekindle cooperation, glimmers of which appeared in the G-20’s offer of debt relief for some of the world’s poorest countries, a joint plea from more than 200 former national leaders for a more coordinated pandemic response and an unprecedented multinational pact to arrest the crash in oil markets.  

The remarkable effort to address the turmoil in the oil markets will be critical to oil’s eventual balance — although the past two weeks have shown that its promised production cuts were too slow and insufficient in the face of oil demand’s plunge. The challenges and opportunities that the collapse in the oil market is pushing to the fore are perhaps just the first taste of Covid-19 induced geopolitical crises that world leaders and policy makers will need to grapple with in the coming months and years.

As history has shown, a big change in energy markets often precipitates a big change in geopolitics. For instance, the shift from coal to oil catapulted Middle Eastern countries to strategic significance. And the recent technology-driven boom in shale oil elevated the United States to net oil exporter status, changing its outlook on the importance of oil in global affairs. We now face a disruption of such proportions that it, too, will reorder some power relationships. 

Right now, the focus in Washington is on how to save the U.S. oil industry, much of which is under enormous pressure given the drop in prices. While this is understandable and necessary, Washington needs to make room on its list of priorities for a number of strategic shifts that the crisis has created. For starters, policy makers should consider four challenges and opportunities that are already manifest.  

Prepare for more fragile, or even failed, states and the risks that can accompany them.

For dozens of oil producers, the plunge in oil prices is devastating. No major oil producer can balance its budget at prices below $40; according to the International Monetary Fund, with the exception of Qatar, every country in the Middle East requires at least $60, with Algeria at $157 and Iran at a whopping $390. The average Brent price of oil over the past month has been a hair above $20. 

Of course, fiscal break-even prices are only one factor when gauging which oil producers are the most vulnerable to deep economic dislocation and its accompanying social and political turmoil. Those with (comparatively) more diversified economies — such as the United Arab Emirates, Mexico and Russia — are obviously better off. Countries with fixed exchange rates — like Nigeria and Saudi Arabia — are at a particular disadvantage, as they need to use their precious foreign exchange reserves to prop up their currencies. Some countries have the capacity to cut expenditures, and others to borrow. And some have legitimate political institutions to manage the inevitable hardships as subsidies are slashed, jobs are lost and capital spending is curtailed.