Energy Markets, Geopolitics, and COVID-19

On May 14, members of the CNAS Energy, Economics, and Security (EES) program held a Twitter conversation on the impact of COVID-19 on energy markets and geopolitics. EES Program Director and Senior Fellow Elizabeth Rosenberg posed several questions to kick off the discussion. Here are some of the top takeaways from the conversation.

How do you rank the drivers that got the energy market to its current state of collapse? What’s most important? Most lasting?

Some observers noted that global oil storage capacity was a key factor in the price collapse. The price war, on the back of a major drop in demand, caused cheap oil to flood to storage centers like Saldanha Bay and Cushing, Oklahoma. As these hubs reached capacity, barge storage followed, to the point of a brief WTI price inversion. Another lasting driver will be COVID-19 itself, as potential second and third waves of the virus threaten to hobble energy demand for years to come.

What countries do you think will come out of the current market conditions as the biggest winners and losers?

Participants noted that states with deep savings, like Russia, and richer Gulf states like Saudi Arabia, seem to be the most resilient. However, their recent efforts to prioritize wage distribution to citizens rather than migrants, such as in many Gulf economies, could put stress on private employers to drive economic recovery as non-national led businesses struggle to access credit. The crisis will highlight how important state-led investment and demand have become to Gulf economies, as several commenters noted. Participants advised that over the coming months, it will be crucial to watch whether fiscal adjustments cause a reduction in household spending and put public projects on hold.

Emerging market oil producers seem likely to be losers. As participants noted, states with deficits prior to the pandemic and oil price war, like Iraq, Algeria, Venezuela, Oman, and Bahrain, are now extremely vulnerable. While some could benefit from prolonged low prices, oil prices will likely be very volatile as the recovery proceeds at an uneven pace, with possible returns to lockdown if the pandemic resurges. Commenters noted that the benefits of any price drops in emerging market countries are rarely passed on to consumers, and are instead absorbed by refiners and fiscal adjustments.

How will the current market conditions impact U.S. ability to impose sanctions on energy targets? What does this mean for maximum pressure on Iran, Russia, Venezuela?

Several participants commented that the crisis will make difficult economic conditions worse for sanctioned nations like Venezuela and Iran, because the high cost of doing business with a sanctioned state will continue to drive energy buyers to other emerging market producers who can now offer even lower prices. Observers noted that, lacking viable customers, sanctioned oil exporters may seek to share surplus oil with allies, such as Iran’s recent shipments to Venezuela and Syria. China has also rarely missed an opportunity to buy cheap oil for its strategic reserve, so its imports may become even more important to Iran. Participants also noted that, largely due to U.S. sanctions, these states have also attempted to diversify revenue sources, potentially reducing the negative impacts of the price collapse.

Commenters also observed that sanctions policy will likely come back into public focus after the pandemic subsides and policymakers turn to the 2020 election. Some wondered whether the administration will rethink the efficacy of its sanctions policy, even as it doubles down on its Iranian and Venezuelan sanctions programs. One commenter argued that Treasury is engaging in only limited efforts to increase humanitarian exceptions, although Andrea Gacki, the Director of the U.S. Treasury Department’s Office of Foreign Assets Control, has stated that the low number of exceptions is due to limited private sector interest, not government resistance. While observers noted that Washington is approaching a substantial debate over the effectiveness of sanctions, they agreed that it will likely occur after the election. Until then, the administration will continue to pursue its “maximum pressure” strategy.

The United States is pushing China back in the energy domain, such as the recent executive order on grid security and a Department of Energy report warning about imports of Chinese uranium. What impact will these measures have on the U.S. energy sector?

One participant noted that these recent moves are unlikely to have major impact on the U.S. energy sector and its ability to recover from the pandemic, given ample global supplies of uranium and the awareness of grid operators of critical infrastructure concerns prior to the recent executive order. While both the executive order and the report may enflame U.S.-China tensions, the administration has considered them for quite some time prior to the current pandemic-related turbulence in the energy sector. The administration intends to use these the measures to reduce key supply chain vulnerabilities for the United States from China, and to a lesser extent, Russia.

What will COVID-19 do for clean energy?

Participants observed that the impact of the pandemic on the clean energy industry is still up in the air and could follow a number of different trajectories. Whether the clean energy industry sees a major boost from the pandemic will depend on a number of factors, including the level of coordinated investment in new technologies, the pace of technological advancement in clean energy technologies, and how various countries decide to support, or not, their energy sectors. The pandemic has also highlighted the supply chain vulnerabilities in portions of the clean energy sector, especially the solar industry and for minerals key to many clean energy technologies. The potential reshaping of those supply chains will also help determine the impact of the pandemic on the clean energy industry.

How will COVID-19 and energy demand collapse reshape the Middle East? What will be front page news in over the next year and three years? What will it mean for Saudi Arabia’s regional influence?

Commenters pointed out that the pandemic is accelerating the budgetary challenges already facing many energy producers in the Middle East as a result of the 2014 price drop and the increasing presence of and demand for clean energy as a result of climate action. According to one participant, this creates a trilemma for Middle Eastern energy producers simultaneously trying to spend on economic recovery from the pandemic, diversify their economies away from reliance on the energy sector, and reduce public spending to protect their fiscal positions. The pandemic is especially damaging to sectors like tourism that many of these countries were hoping would diversify their economies, and the response across the region from governments has been very uneven so far.

What’s Russia’s plan for getting through this energy market collapse? Does it have cash to cover shortfalls? Do sanctions constrain their ability to borrow? Will foreign partners be badly bruised economically?

Participants noted that the pandemic will likely force Russia to defer many of the investments planned for 2020, despite the macroeconomic resilience provided by efforts over the last several years to protect the economy from sanctions. Several participants highlighted that Russia has substantial reserves it has built up precisely to be able to weather a shock like this. In the energy sector, investment is likely to slow, but Russian energy companies have benefitted from changes to the tax regime in Russia that have made it easier for them to continue drilling new oil fields.