How geopolitics is impacting oil and gas markets

Oil and gas are key economic inputs and drivers with countries around the world always planning to ensure sufficiency, affordability, and above all security of supply.

Oil and gas supply chains (production, shipping, pipelines) are part of integrated global commodity markets which are always prone to disruptions by natural incidents, accidents, or political conflicts among or within nations. When a significant disruption happens in one part of the world, supplies and prices across the entire world are impacted.

The ongoing conflicts between Russia and Ukraine are directly and indirectly impacting the entire world. The conflicts have sustained the recent global oil prices above $90 with real fears of climbing to $100 and above, should Russia actually attack Ukraine.

Further, by design or default, Russian gas supplies to Europe have since mid-2021 been dwindling with supplementary supplies of liquefied natural gas (LNG) being sourced from USA and Middle East.

The natural gas supply/demand imbalance in Europe has resulted in high energy prices and escalating inflation.

In normal times Russia supplies about 40 per cent of Europe’s natural gas demands through a matrix of pipelines, some of which pass though Ukraine.

Further, Russia produces about ten million barrels per day (bpd) of oil and is one of the three largest global oil producers together with USA and Saudi Arabia. Russia is also an influential member of the OPEC+ oil producing countries.

USA has threatened unprecedented severe economic sanctions on Russia should it attack Ukraine. It is unlikely that such sanctions will include the ban of oil and gas exports, as this would impact the entire global economy.

However, a war situation will definitely disrupt the flow of both natural gas and oil into outside markets. US is also not expected to impose restrictions on Russia’s use of Dollar financial platforms as this would restrict oil and gas exports.

Sanctions may however include restrictions of future investments and technologies by US companies in Russia’s energy sector. It is also very likely that USA will sanction completion and commissioning of the Russian natural gas pipeline (Nord Stream 2) which terminates in Germany.

Russia has since 2014 annexation of Crimea and subsequent US sanctions been developing alternative oil and gas export infrastructure eastwards into and through China, the de facto partner of Russia in an apparent new “cold war” that pits the two countries against USA/Europe.

In respect of the dollar payment platforms, Russia and China have been mulling an eventuality that could involve the two countries setting up non-dollar payment systems in their oil and gas trade to create independence from the dollar currency platforms which have been weaponised in the past by USA in economic sanctions.

Iran is another arena of ongoing geopolitical activities. Should the outcomes of the ongoing Iranian nuclear negotiations result in a new deal, the US is likely to withdraw economic sanctions, and this will result in increased exports of oil from Iran.

Adding more barrels of Iranian oil into global oil supply will help to depress global oil prices, at a time when other global factors are conspiring to increase prices.

On a wider perspective, geopolitical influences and control of Middle East oil and gas resources are visibly shifting with the West (USA and Europe ) losing economic and political leverage to a fast-evolving Russia/China alliance.

Iran is by any definition already in solid partnership with Russia/China. In respect of Iraq, the country is fast becoming an arena of Chinese and Russian oil and gas investments, especially after USA military withdrawal, and reluctance of western companies to invest in Iraq .

Further, Saudi Arabia is seen as strengthening their diplomatic ties with Russia with whom they share influence in the OPEC. The Saudis and Emiratis are increasingly signing up energy deals with China, the biggest oil export destination for the two countries.

In reality, USA no longer relies on Middle East oil and gas, having developed own surplus capacity. In respect of oil and gas export markets, USA and Middle East have actually become competitors.

Yes as the world strives to realign itself politically, economically, and also militarily, opportunities for conflicts will increase unless matched with strong, wise and visionary global leadership.

Shifting geopolitical relations, temperatures, and actual conflicts will continue to influence global oil and gas markets and prices. And Kenya will not escape the impacts.