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The Big Picture: New Disorders

Copyright © 2021 Energy Intelligence Group

• This is an increasingly disconnected world. Linkages may not seem obvious. But energy, specifically the emergence of US light, tight oil, is a hidden hand driving much of what is happening -- from evolving great power dynamics to global oil market management and the energy transition. • Just as fundamentally as it has transformed US energy fortunes, surging shale output is reshaping Washington’s political behavior, even if frequently at an unconscious level. This has profound consequences for US national security priorities and, by implication, global governance. Greater energy self-sufficiency generated by rising shale output has undermined the long-standing US consensus on the necessity of maintaining the security commitment to protect the oil industry heartland of the Mideast Gulf. The new isolationism has been most loudly championed by US President Donald Trump, as seen in his calls for others to step up to shoulder Washington’s regional security role, and in last week’s decision to step back in Syria. This is likely no Trumpian blip, but rather a structural shift in the way the US interacts with the world. Next year’s US presidential election could produce a new and very different White House. But don’t expect a radical change in direction from this antipathy toward the traditional US Mideast security guarantor role. US shale growth partly underlies the aversion to overseas military entanglements shared by both Trump and his predecessor Barack Obama -- who are so dissimilar in every other way. The combination of trade confrontations and sanctions, spiking Mideast tensions and the US strategic retreat from the region has drawn other powers into the vacuum to contest US pre-eminence in the oil-rich Mideast. This has fueled conflict, including the current Turkish military offensive in northeast Syria (related). It is also impacting regional energy architecture, with Russia and China taking bigger positions in the Mideast's upstream (EC Sep.29’17). US shale has also been a major disrupter of global oil trade flows, undermining Opec oil market management and threatening producer market share. It was the key catalyst for the formation of the Opec-plus production partnership with 10 non-Opec states led by Russia (EC Jan.18'19). Many of the pact’s architects may be reluctant to recognize it, but there is a political dimension to the new grouping. It is potentially transformational for Russia’s role in the Middle East, enabling Moscow to project influence on the international energy stage. The emerging Saudi-Russian oil alliance has also opened up other bilateral investment opportunities and given Moscow, for the first time, a privileged voice in policy formation on both sides of the Saudi-Iranian regional confrontation (EC Sep.20'19). Clearly, while identifying and giving appropriate weight to drivers behind policies and events has never been more challenging, disruptions in the political sphere are impacting the Mideast oil world and vice versa -- an open-loop effect that is today less predictable than in the past, with potentially far more dangerous consequences. Deglobalization and Its Disconnects Part of the reason for this unpredictability is that the emergence of Trump is part of a wider movement that has seen right-wing governments in Brazil, Europe and other places challenge the global consensus on issues ranging from immigration to climate change. This has given birth to an era of policy contradictions. At the same time as the US is disengaging diplomatically and militarily from key parts of the world, it is aggressively seeking to reshape international trade relations to its advantage. Tough sanctions policies also leave Washington vulnerable to accusations that it might be seeking to undermine rival sources of oil exports. Meanwhile, as the need for multilateral action to combat climate change intensifies, so too are deglobalization forces that undermine the international institutions and consensus needed to effect that action. UN Secretary-General Antonio Guterres this week warned that unless help was forthcoming, the UN -- which recently hosted a Climate Action Summit -- will not be able to pay staff salaries next month. All this political, policy and oil market turmoil has chipped away at the institutional support and regulatory direction needed to address climate change challenges. The world is dramatically failing to achieve carbon emissions targets agreed under the Paris climate accord. And it is increasingly clear that not only is there no road map toward the energy transition, but even agreed standards for measuring progress are lacking. The task has been further complicated by the polarized, social media-fueled debate around climate change (related). In the OECD at least, the blame for climate change is increasingly attributed to the oil industry, threatening both its social license to operate and its investor appeal. Unsurprisingly, that's seen the energy transition move to the center stage of oil industry concerns. Oil companies have to adapt or go the way of the "dinosaurs," Total CEO Patrick Pouyanne told Energy Intelligence’s Oil & Money conference this week. Urgent international collaboration is needed “to drive” what Royal Dutch Shell CEO Ben van Beurden called a required “international industrial transformation on an unprecedented scale.” Climate change “is the biggest challenge facing the energy industry, but the energy industry is not the biggest challenge for a world trying to tackle climate change,” Van Beurden argued, calling for regulatory intervention by governments. How the Mideast Gulf responds to the challenge of peak demand and the very real prospect that billions of barrels of oil get left in the ground will be critical to the energy transition. Moreover, a sustained Iran crisis -- as shown by last month's attacks on Saudi oil production facilities -- could impact the future global energy mix in potentially contradictory ways, by prompting Asia’s big economies to accelerate renewables programs and/or to lean more heavily on domestic coal resources (EC Sep.20'19). Economies weakening under trade wars could favor the latter (related). As far as carbon intensity, the Mideast Gulf is certainly guilty of hosting some of the world’s highest emissions per capita. But paradoxically, it also offers some interesting climate solutions. The region has pioneered the lowest-cost solar project on the planet. And its better-resourced national oil companies are investing heavily in future-proofing themselves through aggressive energy efficiency programs, from facilities boasting the latest methane reduction technology to ambitious carbon sequestration projects, as in Qatar and the United Arab Emirates. However, it is clear that industry advocacy of transition fuel sources, such as decarbonized gas, is largely falling on deaf ears as the public debate surrounding climate increasingly becomes a blame game. Real-world impacts of climate change and the societal dislocation it generates could focus minds, but it could just as easily trigger more conflict. To paraphrase China's Mao Zedong: The energy revolution will not be a dinner party. Rafiq Latta, London

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