By Bruce Jones, Deputy Director for Foreign Policy, The Brookings Institution
As global oil prices slump towards $50/barrel, we are hearing more voices in the United States argue that the U.S. is now shielded from global energy dynamics. The implication of this argument is clear, and sometimes explicit: the U.S. should stop bearing the cost of maintaining security in the Persian Gulf, and let others – like China, which consumes a growing share of Middle East energy – bear the burden. Reality, however, is more complicated.
The geopolitical impact of $50 oil.
Let’s be clear: the plummeting price of oil is a big win for the United States, in geopolitical terms, for three simple reasons:
It’s highlighting to the world what was already known to the industry – the huge dynamism of the U.S. energy sector, which has led the shale and tight oil revolution, is leading to huge new U.S. supply. Growing U.S. production is an important part of why prices are falling.
It’s helping some of our closest allies – in Europe, where a falling oil price will help the European Union weather the latest round of the Eurozone malaise; and in Japan and India, where both Prime Minister Abe and Prime Minister Modi are launching important economic reforms for which falling energy prices are an important boost.
At the same time, it’s hurting our most worrisome competitors – especially Russia, whose economy has taken a quick turn for the worse. And it’s putting pressure on Iran at a time when international support for tough sanctions are waning, and on Venezuela, long a thorn in America’s southern side.
Of course, the U.S. oil and gas industry will be hurt in the short term by the falling prices, as many producers wait to build more wells. One Citibank analysis suggests that current prices will trim projected growth in American production by 30% – though not eliminate it. Any resources that are not explored now are there to be recovered when prices rise again – as they undoubtedly will. And meanwhile more sectors of the U.S. economy gain than lose from cheap energy prices. The falling price of oil is likely to add depth to the U.S. recovery now gaining serious traction.
But the U.S. is still impacted by global energy dynamics.
First of all, U.S. oil prices are inextricably linked to the global price of oil. Let’s not kid ourselves that Saudi Arabia is out of the global prices game. For now, Saudi Arabia has a triple reason to see prices low: it puts pressure on U.S. producers; it hurts Iran; and it punishes Russia. Some have disputed that Saudi Arabia has any geopolitical motive in low oil prices—in my view, they see win-win-win and feel no need to choose between three policy objectives that are all benefiting from low prices. And they have the reserves to weather low prices for at least a year. But when they start to feel the domestic pinch, Saudi Arabia can still cut back on production and put upwards pressure on prices.
Second, China’s slowing demand is a big part of the reason for the drop in global prices. A good thing for America, right? Well, it’s a mixed blessing at best. In narrowly conceived geopolitical terms, slower Chinese growth keeps America on top for a while longer. But: the U.S. economy is now far more dependent on global trade than it was a generation ago, and slowing global demand makes U.S. sustained recovery just that much harder.
Finally, the U.S. will be called on to act in the Middle East – even if our regional energy interests for domestic consumption are less. If there’s deeper turmoil in the Middle East, who other than the U.S. has the capacity to respond? China is upping its engagement economically and diplomatically in the region, and so is India; but only the U.S. has the military capability to maintain security in the Straits of Hormuz, through which 30% of all seaborne oil sailed in 2013. And that’s going to be true for 2-3 decades to come. If the U.S. does not play this role, it would face huge economic – not to mention political and humanitarian – consequences.
The U.S. should shape the direction of the other big winner: India
The U.S. is not the only one benefiting from the dropping oil prices; the other big geopolitical winner from low oil prices is India. How India uses these benefits will shape geopolitical and climate changes to come, and thus the U.S. has a dog in the fight in helping India move forward.
India has unique challenges, which will largely benefit from lower oil prices. In particular:
It’s a rising power – the #3 economy in the world in purchasing power parity, with the #5 navy in the world; but it’s still a developing country too – it has ca. 300,000,000 people facing acute poverty and no or little access to modern energy.
Prime Minister Modi is set to launch a set of reforms that could help India catapult itself to the next round of growth – but he’s unlikely to succeed if he can’t simultaneously reform India’s hugely tangled energy sector, and deliver some progress to the energy poor.
Low oil prices will help on every aspect of this, and help Modi deliver on his large promises of economic reform – and the U.S. has a strong stake in seeing India succeed, and develop as a natural counter-weight to China in Asia.
We can’t separate these issues from the climate debate
Finally, we have to take into account the tight relationship between global energy markets and climate change. The U.S. is finally taking a leading role in forging global arrangements:
The U.S.-China bilateral climate deal was a diplomatic shot in the arm for global climate negotiations—putting major pressure on other countries to come up with serious national plans.
There will probably be a climate deal in Paris – even a legally binding one – but it’s impact on markets may still be limited.
Low oil prices both help and hurt – they may limit the incentive to shift to renewables, but they also free up private and public monies to lay the necessary investments and infrastructure for a sustained shift in the energy mix. The United States can’t insulate itself from global weather and climate patterns; how other countries tackle coal, oil and gas will directly impact U.S. efforts to make progress on climate change.
To sum up: the U.S. still faces price risks, political risks and “pollution” risks – i.e. climate change risks – from global energy markets. New domestic production has delivered economic and geopolitical benefits to the U.S. economy and to our allies, but there’s a broader and more complex global picture. Any suggestion that we’ve managed to insulate ourselves from global energy dynamics is overlooking key risks.
Bruce Jones is Deputy Director of the Foreign Policy program and a Senior Fellow in the Project on International Order and Strategy at Brookings. He is also a consulting professor at the Freeman Spogli Institute at Stanford University. His research focuses on U.S. policy on international security, global order, international conflict management and fragile states. His most recent book, The Risk Pivot: Great powers, International Security and the Energy Revolution co-authored with David Steven, was released in November 2014.