Originally published on April 13th, 2020
As the world surpasses 100,000 deaths from COVID-19, we have been gripped by fear. Panic and panic buying are rife. The media has capitalised on this by affording little airtime to any other coverage – despite the fact that deadly conflicts rage on in multiple regions across the world. Governments have mobilised to use this crisis to their advantage, with the Chinese propaganda machine citing the “chaos” and high rate of spread in Western Europe to advance their claims against democracy. In Belarus, the president Alexander Lukashenko complains that COVID worries are overblown, citing the high death statistics for unrelated diseases, such as tuberculosis and influenza. His cure is vodka and saunas – and despite the painfully stereotypical image of post-Soviet culture this inspires, many seem to be taking his advice. Alcohol sales have risen, along with marijuana, as people spend more time doing – well, nothing. And amid this eclectic mix of terror and complacency, authoritarians like Hungary’s president Viktor Orbán are steadily crushing democracy in a fist of illiberal power. Through emergency bills, politically savvy leaders are able to harvest total control of the state from the coronavirus crisis. Journalists can no longer speak freely, minorities cannot sleep safely at night, and, due to centre-right support for Orbán’s dictatorial party in European Parliament, the EU is increasingly looking like a non-democratic institution. Orbán has the EU under his control: whilst passing a coronavirus bill that German media likened to Hitler’s Enabling Act, EU bureaucrats meanwhile maintain funding for 95% of Hungarian public works projects.
However, today the fundamental challenge to the balance of world power is oil, not COVID-19. Whilst deadly, coronavirus is a passing phenomenon, that will very likely lose its present significance in the national consciousness within a few years of its passing. What do not lose their significance are the global networks that keep modern life ticking: transport, electricity, the water supply, the financial system – and, of course, unsustainable energy.
Oil is more important to the economy than key workers, face masks, or coronavirus bills. The cheap energy resources we get from crude oil and natural gas have fundamentally transformed us. They allow personal transportation for billions of people, facilitate delivery of goods and services across far-flung regions, and massively increase our trading capacity, leading to one of the greatest economic booms in history. Oil products have enabled English-speaking military supremacy for 150 years, causing the lowest levels of global conflict in history. From a humanitarian perspective, the invention of plastics has revolutionised the medical profession, with equipment used in hospitals and in surgeries being made much safer. On the operating table, oil has saved lives. For cancer patients and those with chronic conditions, their treatment often consists of drugs engineered from products of crude oil. It is a crucial component of modern healthcare. Much like coal-based technologies drove the industrial revolution – and today facilitate rapid growth in China – oil powered the late industrial revolution. The average Brit went from living with no running water, toilets or electricity; to a WiFi- enabled, insulated home, with safe heating and a modern kitchen. The essential conditionof the twenty-first century is oil – the ability to access massive amounts of stored chemical energy for relatively little cost. Hence, changes in the oil market affect all our lives. Nowhere was this shown more visibly than during the 1973 crisis.
At the time, the US was witnessing an unprecedented economic boom. Emerging from WWII comparatively unscathed, America had taken the momentum it built before the war and multiplied it, through the birth of consumerism and mass production. The new interstate system, which transformed the way people travelled, was the largest road network in the world. Reams of money circulated between taxpayer and industrialist due to distant post-colonial wars; yet because the fighting was not on their home turf, America was not subject to most of the societal costs of their warfare. Research and Development spending was at an all-time high, as the Space Race piqued newfound interest in science and technology. But this prosperous dream was about to be cut short.
On 6th October 1973, Syrian and Egyptian forces staged an attack that penetrated deep into Israeli territory. Although intelligence services in Israel had been made aware of a potential attack, they were instructed by US advisory not to launch a pre-emptive strike against Egypt, fearing accidental escalation of the ongoing conflict. Thus, when fighting exploded during Ramadan and Yom Kippur, the Israelis were caught on the back foot. The US agreed a massive military resupply effort known as Operation Nickel Grass. In response to this intervention, members of OPEC, a global oil cartel aligned with the Arab states, increased their posted prices fourfold. Two months later, OPEC stopped exporting oil to America altogether. Between October 1973 and March of the following year, oil prices in the US increased by 300%. This caused nationwide shortages of gasoline, practically grounding the national economy until emergency measures were put in place. The massive reliance of the US on foreign oil was exposed.
Foreign, enemy states held a choke chain on the American economy. The economic development of the late 60s and 70s had caused a massive boom in demand for oil. This thirst was slaked by imports from abroad, particularly the Middle East. For US foreign policy, which had been Eurocentric since 1776, Saudi Arabia became indispensable within a matter of weeks.
Over the coming years, US presence in the Middle East developed and expanded. Back home, politicians scrambled to insulate the economy from further shocks. Regulations were introduced to improve fuel economy of cars. Although road vehicles placed a huge burden on the oil supply, up until 1975, cars produced in America were extremely inefficient. The speed limit was also decreased to 55mph, minimizing fuel usage. Caves underneath Texas and Louisiana were turned into giant oil storage tanks, enabling the US economy to keep going without foreign imports for up to 90 days. These reserve systems were integrated into transportation and refinery networks, so that stockpiled petroleum could go from cave to gas tank in less than 2 weeks.
In many respects, 1973 ushered in a new era of global history: one which displayed a growing acceptance that modern life takes place in an ever more connected, and consequently less insulated world. Coronavirus has demonstrated this once again. Not only has the spread of COVID-19 shown how things that occur thousands of miles away profoundly shape our lives, but it has also been a crash course in black-swan contingency plans for national governments.
Although much has changed since 1973, OPEC dominance has not. Just three states – Saudi Arabia, Russia, and the US, have almost complete control over the energy supply, two of which are OPEC-aligned dictatorships. The world is led ideologically by capitalism, and economically by oligarchs. By controlling the quantity of oil supplied to global markets, OPEC is usually able to keep prices within a certain range. Establishing what this range should be is often a cause of significant tension. Whilst some nations can bring in greater revenues by increasing production and lowering prices, others need high prices to pay for basic government services. States such as Saudi Arabia can extract oil from existing wells for single-digit-figures per barrel, but Algeria and Iran need to sell barrels for more than $100 each to balance their budgets. Thus, the oil price can have a significant effect on the stability of dictatorial regimes.
In early March, Russia and Saudi Arabia fell out over crude production cuts. The Saudi government, enraged by the Russians’ brazen negotiations, increased their output from 10 to 12 million barrels per day, aiming for 13 million barrels per day by April. At the same time, a report was published finding that oil consumption would fall in 2020 due to Coronavirus. The projected decrease in demand, combined with the flood of additional supply, sent prices for some blends low as a single dollar per barrel.
Low prices mean that governments cannot pay their debts, new wells won’t be drilled, and private companies will go bankrupt. The current conditions massively favour the largest producers, who can take on lots of debt or burn through cash reserves to stay afloat. They are much less favourable to highly indebted states, who will struggle to make ends meet if these conditions continue. However, the most egregious effect may be on US Shale producers. The US has recently experienced a massive increase in its crude and gas production due to the development of fracking technology. Shale oil, as it is known, has turned the US from a net importer to an exporter of oil, for the first time since 1973. As the US has developed the fracking industry in the Permian basin, the sway of OPEC over oil prices has decreased. This has reduced US dependence on foreign oil, and by proxy, on foreign wars. Yet this condition may be reversing: most shale operations are only profitable at prices of $48-54 a barrel, whereas benchmark prices over the last month have averaged $30. As more and more shale operators go bust, US exports will decrease, and this combined with cuts to capital expenditure will result in a weakening of the US position. Although OPEC has recently re-agreed production cuts with both Russia and now America, the US market is likely to be more adversely affected by coronavirus. Russian and Saudi production is largely state-run, but US production is in large part driven by smaller, higher cost operators; particularly in the Permian region which has spurred recent growth. Thus, in light of the coronavirus we are likely to see a steady decline in US production, and a return to Saudi-Russian hegemony over the export market.
There are two scenarios worth considering with COVID-19. One, a “V-shaped recovery”: the world recovers over a matter of months, and, we have a rapid return to economic growth, prosperity, and global oil demand. Two, a “U-Shaped recovery”. In this scenario, demand remains stagnant for a long period of time, as the virus rages on and the world struggles under the impact of mandatory lockdown. For the oil industry, the first scenario will in the long run be a good thing. As smaller producers go bankrupt, larger firms will move in to buy up their assets, leading to consolidation of the industry and lower production costs. But for all of us, the second scenario could have massive and wide-ranging effects. If oil prices do not recover, extractive regimes will no longer have an income stream. This could lead to destabilisation, as autocrats will no longer be able to offer financial benefits to the elite classes that support them. Foreign states will be reluctant to offer loans to these failing governments, as they themselves will already be struggling with the double dilemma of viral spread and stalling economies. Democracies, which will likely fare better due to their greater economic development and health services, will not want to be seen supporting tyrants, let alone give away vital resources to them. Although it seems improbable as most countries have only just experienced the first month of lockdown, if the rate of infection does not significantly slow in a matter of months, coronavirus may cause a collapse of multiple dictatorial regimes. Amidst the chaos of a continuing pandemic, the possibility of interim governments successfully forming seems unlikely. By 2025, we may be looking at a significant lengthening of the list of failed states.
No one can predict how long this virus will last, or how many lives it will take. But whatever the consequences, we need to look beyond the health risks to understand the full impact of COVID-19. The energy sector plays an outsized role in the global economy, and is integral to the path of human development. The balance of power in the world relies in large part on who controls the petroleum supplies. Thus, lockdown measures aimed at slowing the spread of the coronavirus may have an extremely large impact on national and international politics, as well as foreign policy. It goes without saying that more research needs to be done in this area, so we can better come to grips with the knock-on effects of this pandemic.
Oliver Banks is a Politics, Philosophy, and Economics student at the University of Oxford.
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