Warnings for Australia in great energy disruption

THE oil-price shock is reshaping the geopolitics of the world.

THERE are robust arguments over what exactly is driving the great energy shift across the globe — a technological revolution in shale oil and gas in the US, the bastardry of Saudi sheiks, or something more sinister. But the changes at ground level are simply stunning. Since September, the oil price has plunged more than 50 per cent: from $US110 a barrel to $US53 at the end of last year. That plunge has led to the lowest petrol prices at the pump in Australia in four years, a boon for motorists — and politicians who live and die on cost-of-living issues.

More crucially in the long run, as Graham Lloyd explains in Inquirer today, the plummeting price of energy is reshaping global economic and military power structures. The seeds are being planted for significant security adjustments in the Middle East, Asia and Latin America. Iran and Russia, two states shunned by the West for different vices, along with Venezuela, are likely to fare worst in the short term. The weakness of Russia spells trouble for Syria; Moscow has bankrolled the Assad regime in Damascus. A weak oil price also limits the financial strength of Islamic State, which has seized oil production facilities in Syria and Iraq.

The energy market is being utterly transformed; high-cost producers will be gobbled up by better operators. Investment plans are being rewritten day to day. The renewable energy industry is being sideswiped, particularly in the US, by the shale revolution. All this turmoil is happening now, to be sure, but no one can say how far and deep the realignment will go. Australia — a price taker in oil and gas and, in truth, a medium-sized sideline observer — will not be immune from the disruption.

The recent tumult was triggered by Saudi Arabia’s decision to maintain production in the face of the oil-price tumble, to the chagrin of its partners in the OPEC cartel. In due course, the losers from this move have been Russia, Iran and Venezuela, for various reasons rivals and enemies of the Saudis and the US. In Moscow, the feeling is that the fix is in. The rouble has plunged and the economy — hurt by low oil prices and Western sanctions after Russia annexed Crimea and backed rebels in eastern Ukraine — has been smashed.

President Vladimir Putin’s aggressive military expansionism and rampant nationalism is built on petrochemicals. Oil and gas output makes up one-quarter of the country’s gross domestic product, two-thirds of its exports and brings in half of its revenue. If the oil price remains at current levels, Russia’s economy will shrink by almost 5 per cent this year. Moscow’s budget deficit will balloon. This puts a cloud over Mr Putin’s strategic ambitions and introduces uncertainty to the Kremlin.

Already, China has stepped in to bail out Russia. Beijing is positioning itself surely as a lender of last resort, having also come to the aid of Venezuela and Argentina in recent times. Perhaps these moves signal a permanent change in the world financial order that began 70 years ago in Bretton Woods. For China, a major energy importer, lower oil prices are a blessing at a time when it is experiencing a pronounced economic slowdown, falling house prices, rising public and private debt and sluggish growth in exports.

The US, however, is emerging with renewed economic strength and new-found energy security. The unleashing of “fracking” technology has spurred a boom in US oil and gas supply. In the past six years, it has added about four million barrels of oil a day to supply, a testament to America’s genius for innovation. As The Wall Street Journal’sBret Stephens wrote the other day: “Fracking has now up-ended energy markets, pummelled petrodictators, confounded OPEC, forged deeper North American ties, slashed US greenhouse gas emissions to their lowest level since 1995, and sunk a nail into the coffin of most renewable-energy schemes.” According to analysts Stratfor, this structural shift in energy costs will further strengthen America’s comparative advantage in the manufacturing, industrial and refining sectors. In a sign of US energy might, President Barack Obama this week lifted a 40-year ban on the export of light crude oil.

For Australia, the great energy disruption is just that. It cuts us both ways. As consumers we win, but as producers we are challenged, especially in liquefied natural gas, a growth industry with enormous investment and production potential. In a speech last June in Houston, Texas, Tony Abbott declared: “Australia should be an affordable energy superpower, using nature’s gifts to the benefit of our own people and benefit of the wider world.” That sentiment, though not false, should be tempered by events. The international market in gas is expected to surge in coming decades and we are well placed to share in the spoils; our producers have secured long-term contracts and China is a partner in many ventures, providing a hedge against price falls. But the new disorder is likely to persist for many years, as the momentous changes we are now getting to know wash across the globe.