Geopolitical Threats to World Energy Markets

According to best estimates, the energy mix of the world will change only slowly over the next several decades. Oil, natural gas and coal will continue as the primary energy commodities of world commerce, so they will remain the main focus of the geopolitics of energy. Within this context, the article analyzes the implications of energy geopolitics for energy markets. The rise of national oil companies (NOCs) and the expansion of bilateral contracts between energy producing and energy importing countries threaten to diminish world energy markets. Pipelines and sea lanes are critical for international energy commerce, both with dramatic importance for energy finance. The quickly maturing liquid natural gas (LNG) infrastructure and the huge promise of shale gas will raise the importance of natural gas in world energy consumption and increase the independence of some countries with potentially large significance for energy finance. The article includes a brief consideration of the changing role of nuclear energy after the 2011 tsunami in Japan and the disaster at the Fukushima-Daiichi nuclear plant, and it concludes with a consideration of climate change and the future environmental impacts of the world's changing energy consumption patterns. Key Words: Energy; Geopolitics; Energy markets; Oil; Natural gas; Coal; Nuclear energy; Climate change; National oil companies (NOCs); Bilateral contracts; Shale gas; Liquid natural gas (LNG); Tsunami; Fukushima-Daiichi; Pipelines; Sea lanes. In early 2011, the price of crude oil rose by 62 percent in a single month, rocketing from $75 to $120 per barrel as protests and revolts shook an arc of Arab countries. The price of crude jumped six percent on a single day, February 21, in response to sudden and dramatic unrest in Libya. This strong price reaction occurred even though Libya only accounts for about two percent of annual world oil production. The large influence of troubles in this relatively minor producer stemmed from two main sources. First, already occurring unrest across the oil-producing countries of the Middle East, accompanied by fears that other nations would soon be inflamed, raised market doubts about the ability of other producers to surge their production to compensate for the withdrawal of Libyan oil from the market. Second, Libya produces a light sweet (low sulfur) crude that is particularly suited to certain refineries and is especially valued in some market segments. Saudi Arabia, the main supplier thought to be capable of a surge in production, pumps a heavier more sour (higher sulfur) crude. With many refineries in Europe and Asia being poorly equipped to handle higher sulfur crude, an expansion of Saudi production could not adequately substitute for the missing Libyan contribution. Energy prices have always been subject to shocks from events that occur in single countries, and this will remain true as long as major sources of energy are concentrated in relatively few countries. However, looking back as well as forward, larger geopolitical considerations go beyond the impact of any single nation, and those transnational and more enduring factors are the focus of this chapter. Energy Geopolitics for the Next Generations: Demand, Mix, and International Movements The overall contours of energy geopolitics are rather straightforward and understood by most people at least at a casual level. First, there are several basic types of energy sources: fossil fuels (including coal, oil, and natural gas), nuclear energy, and renewables (including hydroelectric power, wind energy, biomass, waste products, and solar). Each of these resources is best suited to particular uses. For example, hydroelectric power can generate electricity quite well, but it would be a poor choice for a transportation fuel. Further, these various energy resources are distributed across the world in a way that does not match the point of most likely or beneficial consumption. …