Ideas & Debate

Dynamics that drive global oil alliances

As an importer or exporter of fuel, Kenya is bound to be impacted by global happenings. file photo | nmg
As an importer or exporter of fuel, Kenya is bound to be impacted by global happenings. file photo | nmg 

In 2014, I analysed in this column a number of global events that were impacting the oil industry. Firstly there was the Ukraine/Crimea crisis that led to economic sanctions against Russia by USA and EU; then the ISIS insurgency emerged in Iraq and Syria and spread its influences across the world ; and in the same year oil prices dropped from above $100 to under $50.

Other occurrences with varying impacts on oil industry that have subsequently taken place include the Paris Climate Accord of December 2015, and the lifting of Iranian sanctions after the signing of the Nuclear Deal in the same year.

There were also internal conflicts in oil producing Libya, Nigeria, South Sudan and Venezuela, all of which reduced global oil production capacity.

In normal times of tightly balanced oil demand and supply, any of the above happenings would have caused up/down movements in global oil prices. But this was not the case because of global oil oversupply which subdued prices.

Massive upstream oil investments prior to 2014, buoyed by high oil prices over the previous decade, were producing more oil than the markets could take.

Most of the incremental production was coming from the USA shale fields. Production reduction interventions by oil producers, Opec and Russia have however stabilised prices at around $55.

On the sidelines of the oil story, geo-political alliances among key oil producing and consuming nations have been shifting.

With shale oil success story, the USA has nearly become oil self sufficient, thus diminishing dependence on the Middle East oil imports. Previously, oil supply security was a key driver of America’s Middle East policies, but this appears to have shifted to mostly terrorism eradication. This has left former strong Middle East allies of US feeling abandoned.

The 2014 Ukraine-based sanctions mostly affected Russian oil and gas industry at a time when oil prices were crumbling.

The EU markets for Russian oil and gas became uncertain, while investments and technology partnerships between US oil majors and Russia were abruptly stopped.

This has prompted Russia to shift its economic-political diplomacy towards the Middle East, China and India.

The ongoing Opec/Russia co-operation to control oil production to strengthen prices has been an effective entry point for Russia into the oil producing Middle East.

On this platform, we have among others the Saudis, Iranians and Russians, and their common agenda is to strengthen global oil prices while monitoring competition from USA shale oil production.

The Russians are successfully playing the Middle East card. While Russia is a long time ally of Iran, the Saudis are in perpetual rivalry with Iranians over the Shia/Sunni dominance in the region.

Early this month the Saudi King, a traditional ally of USA, made a rare trip out of his country to sign economic cooperation deals with the Kremlin. These included energy related deals.

The lifting of Iranian economic sanctions after the signing of the 2015 Iran Nuclear Deal has allowed an influx of Western capital (not American) into the Iranian oil and gas sector which had been starved of investments.

As long as Russia remains very dependent on oil and gas resources, it is expected that it will remain economically and politically close to the other oil dependent economies while forging very close ties with the heavy oil demand countries like China and India.

These two Asian countries are already filling voids in Russia oil and gas investments. The EU on the other hand continues to develop alternative and diverse sources of oil and gas, away from Russia.

It is the Paris Climate Accord that will however shape the future oil supply/demand barrel. Riding on the banner of renewable energy the Paris accord has over the past one year consolidated global consensus and momentum away from oil. In the long term this will pose economic threats to countries heavily dependent on oil.

Yes, many dynamics including oil are shaping new geo-political alliances globally. Direct and indirect impacts on Kenya are unavoidable, either as an oil importing country or an aspiring oil producer and exporter.