More and more of the world’s oil is falling into the hands of state-owned companies – with potentially devastating consequences for the West, reports Simon Wilson
What is ‘energy mercantilism’?
Mercantilism dominated economic thought in Britain and Europe from around 1550-1750. In essence, it involved using protectionist measures, such as
trade tariffs, to ensure that a country maintained a trade surplus by exporting more than it imported. ‘Energy mercantilism’ – an intentionally pejorative expression – describes a worrying situation in the oil and gas markets. Rather than rely on international energy markets, rising powers such as China and India have been tying up private bilateral supply deals with producers – including nations the West is reluctant to deal with. China and India aim to increase their security by securing energy supplies that will fuel continued high growth and increased global clout. Typically, these deals are underwritten by layers of investment and strong diplomatic ties
with producers.
So how might China secure supply?
Angola is to supply China with 200,000 barrels per day (bpd) of crude oil for the next ten years at $60 a barrel, in return for Chinese spending on major infrastructure projects. Separately, China National Petroleum Corp has signed a long-term deal with Sudan, which supplies 10% of China’s petrol imports, that is expected to supply 300,000 bpd. In addition, Beijing has signed strategic energy partnerships with suppliers such as Russia, Iran, Venezuela, Kazakhstan, and Saudi Arabia. Put together with similar deals with Qatar, the UAE and Kuwait – and factoring in India’s very similar global strategy, this means that two-thirds of the Persian Gulf’s oil exports now go to Asia – and this proportion is set to rise sharply.
Why is this state of affairs controversial?
From the West’s point of view, bilateral deals lock up too much of the world’s supplies and harm the liquidity of the open market. Increasingly, off-market deals are likely to make customer nations in Europe, North America and Japan more prone to price shocks and volatility, because they make the global market less able to handle tight markets, shortages and disruptions to supply.
But this is far from just a clash between free-market principles and anti-competitive bilateral tie-ups. It also concerns huge questions of global security and geopolitics – especially since Russia, a major producer, is itself so strongly focused on resource nationalism.
What makes this a geopolitical issue?
When oil is traded globally on highly liquid bourses (such as, principally, the New York Mercantile Exchange, NYMEX), everyone pays pretty much the same for their oil, and it is hard for a potentially hostile producer nation to use its oil-rich status as an economic weapon. But as industry analyst Jeff Vail puts in a recent Energy Bulletin essay, “long-term, bilateral supply contracts fundamentally alter this dynamic.” First, because they mean producers can in effect pursue differential pricing strategies. And second, because they make it much easier for producers to use ‘precision-targeted’ embargoes to damage political enemies. Naturally, both of these factors are most significant, and most worrying, for those nations who remain primarily dependent on the open market for their energy supplies – Western Europe, Japan and the United States, which imports 60% of the energy it requires.
What’s in it for the energy producers?
If the world’s big oil and gas companies were publicly owned businesses answerable to shareholders, they might be expected to pursue policies based on maximising profit rather than national strategic interests. But they are not. Increasingly, the world’s biggest energy groups are nationally owned companies (NOCs) operating under the control of largely authoritarian, statist regimes. Figures cited by the Wall Street Journal show that an astonishing 90% of the world’s untapped oil reserves are in the hands of state-owned companies – far more than a few decades ago. This means that today, ExxonMobil ranks as merely the fourteenth-largest holder of oil reserves.
Which nations are we talking about, exactly?
Russia is pursing a vigorous policy of resource nationalism. Vladimir Putin’s government has seized control of the oil industry over the past decade and openly uses its position to bully and punish its ex-satellite states in Eastern Europe. But it is far from alone. From Latin America (Venezuela, Ecuador), to the Middle East (Iran), a new ‘Axis of Oil’ is emerging.
These nations do not fear the displeasure of the US, and – safe in the knowledge that they have an alternative market in China – are far more interested in building and deepening bilateral ties with each other. Venezuela’s Hugo Chavez might be hated in Washington, but Iran, strongly emerging as a major regional power, has just agreed to invest $9bn in his country.
What does all this mean for the dollar?
In a long essay in the Asia Times, energy author Joseph Stroupe explains how energy mercantilism has the potential to hurt the US dollar. Unlike the New York and London markets, the existing and about-to-open oil and gas exchanges in Shanghai and St Petersburg deal in yuan and roubles respectively – and not in US dollars. Once these and other new exchanges are established, the power of traditional dollar exchanges will shrink. Ultimately, their market may become confined to the minimal 9% or 10% of reserves controlled by Western oil majors. That will increase volatility in the dollar-denominated exchange, exacerbate the dollar’s weakness, and hasten its end as the global reserve currency.