20 Apr

Petrodiplomacy 2.0: OPEC, COVID-19 and the changing face of global energy politics

Posted By Politybooks

By Thijs Van de Graaf

Written 10th April 2020

The videoconference meeting of oil producers on April 9 was in many respects historical. The OPEC countries led by Saudi Arabia and a host of non-OPEC oil producers led by Russia agreed to a deal to curb oil output by 10 million barrels per day (mb/d). This would be, by far, the biggest coordinated cut in oil production ever.

There has been no formal announcement of a deal, however, because Mexico still refuses to endorse the agreement. Moreover, there is a G20 energy ministers meeting today which might lead to additional output curbs by G20 countries like the US, Canada, and Brazil. In the case of the US, these curbs would happen automatically because of low oil prices rather than being ordained by the federal government, something which would be illegal under US anti-trust laws.

Oil traders were disappointed when they learned about the contours of the deal, sending oil prices downwards by 4% on Thursday. Such is the scale of demand obliteration by the pandemic today that the largest oil supply cut in history sends oil prices … downward. Oil demand is decimated because of the coronavirus, which has shut down large parts of the economy. Low prices cannot stimulate demand as they usually do since about 40% of the world population is under lockdown and governments all around the world have restricted travel.

The oil industry has witnessed grave shocks before, but it is becoming increasingly clear that the entire industry has been forever transformed by the shale shock and the looming peak in oil demand. It seems like COVID-19 has brought forward oil demand trends by at least a decade. Yes, there might be a rebound in oil demand if the lockdowns are gradually phased out. However, oil demand might never fully recover to the pre-crisis levels of 100mb/d if more people continue to work from home, travel less, and companies bring supply chains closer to home.

The oil-exporting countries recognize the gravity of demand obliteration, because their tentative deal of supply cuts is supposed to last at least until April 2022. This would mean that the OPEC+ group has had joint production curbs in place for six consecutive years, testifying to how much oversupply there currently is on the market.

Overall, it is clear that global politics of energy are not what they used to be. This is the gist of the argument of my new book, Global Energy Politics, coauthored with Benjamin Sovacool. For decades, we lived in a world where oil demand grew unabatedly and consumer countries’ primary worry was to secure oil imports from the Middle East and North Africa. Today, global energy politics is about more than oil alone—it is also about climate change, the energy transition and decarbonization of the world economy. COVID-19 has brought forward some of the trends we only expected to see towards the end of this decade. Meanwhile, the producer countries scramble to find a coherent answer to these colluding challenges.

The petrodiplomacy of countries like Russia and Saudi Arabia may look increasingly anachronistic, but it is not likely to wither away soon. It is set to become a permanent feature of an energy world that is adjusting to multiple shocks in technology, the economy and wider geopolitics.

Thijs Van de Graaf is Associate Professor of International Politics at Ghent University, Belgium and co-author of Global Energy Politics, which is available now from Polity.