Episode 3: The Crude Truth

 

Emma Ashford on the Global Energy Crisis

The fallout from Russia’s war in Ukraine has disrupted the global energy market and hiked the price of fuel nearly everywhere around the world. In Europe, which finds itself caught between efforts to cut itself off from Russian oil and Moscow’s firm grip on energy exports, the repercussions of today’s energy crisis are acute. While in the United States, which experienced high prices at the pump, efforts have been underway to resolve the crisis. But how much control does the United States have, and does it require the United States to lean on the shoulder of illiberal partners like Saudi Arabia?

Often referred to as “black gold,” oil plays an important role in international affairs. Still, according to Emma Ashford, an oil and international relations expert, its role is frequently misunderstood. Emma joins the Eurasia Group Foundation’s Mark Hannah to discuss her new book Oil, the State, and War and complicate commonly held misconceptions on oil’s influence on foreign policy. Mark and Emma also break down America’s efforts to address the energy crisis, green energy’s potential impact on geopolitics, and the tangled web that is the global energy market.

Emma Ashford is a senior fellow at the New American Engagement Initiative at the Atlantic Council’s Scowcroft Center for Strategy and Security and a nonresident fellow at the Modern War Institute at West Point. She is the author of Oil, the State, and War: The Foreign Policies of Petrostates (2022).

This podcast episode includes references to the Eurasia Group Foundation, now known as the Institute for Global Affairs.

Archival:

Transcript:

EMMA ASHFORD: President Trump once said, “The goal is American energy independence.” And I hate that phrase because it is completely meaningless because we can produce all the oil we need. But the price is still going to be dependent on what happens elsewhere in the world. 

MARK HANNAH: Welcome to None of the Above, a podcast of the Eurasia Group Foundation. My name is Mark Hannah. This week we're going to talk about what's been on everyone's minds: gas prices. 

Interlude featuring archival audio 

ASHFORD: We all know what price vulnerability is, at least in the practical sense. You have felt the pain in the last couple of months. Price vulnerability is because oil is priced globally. A barrel of oil costs the same everywhere in the world. So, when prices go up, when there's a shortfall in one place of the market, prices go up everywhere. And that's what we're all experiencing right now: higher prices. 

HANNAH: That's Emma Ashford. Emma is a senior fellow at the New American Engagement Initiative at the Atlantic Council. She's also the author of a new book, Oil, the State, and War: The Foreign Policies of Petrostates. And she joins us from Washington, D.C. 

ASHFORD: But then there's the secondary issue: supply vulnerability. And that is the notion that in a conflict, perhaps in a war, you literally might not be able to get the oil you need at any price. And if you go back and look at the history of the Second World War, even the First World War, what we see is states in the Middle East competing and fighting over oil resources they needed to win the war. And there's some really good research out there on how Japan's energy shortages helped to drive its behavior in the Second World War, on how German behavior in the First World War was partly driven by its energy shortages. And so, what that means for us today is, unlike in 1979/1980, when there was a genuine risk that if somebody disrupted transit of all oil through, say, the Straits of Hormuz, that America literally might not have the oil it needed to fight the Soviets in Europe, for example. That concern is gone. We are not worried about that. If anybody needs to worry about that, it's China, whose oil now comes through that transit strait. And so, you can see we still have to worry about the price issue, but we don't have to worry about having enough because we have it here at home if we actually need it. 

HANNAH: While oil prices affect all of us in some way, certain countries are feeling the impacts of the current energy crisis harder than others. That's because many countries are dependent on Russian oil and gas. 

ASHFORD: Russia is—depending on what year you look at—the second or third largest producer of oil in the world there. Number one or number two on gas, sometimes number three. So, they are a substantive producer of these resources they sell all over the world. But the really interesting question is there's long been this fear of an energy weapon. The idea that states like Russia—states like the Arab OPEC members in 1973 when they caused the oil embargo—could use their oil as a weapon—threaten to shut off the oil, actually embargo oil, and use that as leverage, as a negotiating chip.

Interlude featuring archival audio 

ASHFORD: It's actually not that effective in most cases. What mostly happens is maybe it might be useful for getting a price concession. It's not nearly so useful for political results. 

HANNAH: Is that true right now, though? While some countries have curbed or stopped buying Russian oil and gas in hopes of weakening Russia and ending the war in Ukraine, not all countries can afford to do that. 

Interlude featuring archival audio 

HANNAH: Russia is something of a super-producer in the world of oil. Untangling a complicated and interdependent energy market from them is much easier said than done. 

ASHFORD: European states need Russian gas. Russia needs European money. And what we've seen is that the shift in oil markets has actually ended up enriching Russia. So, they've come out better on this than we have by trying to get away from Russian energy. But the question of gas is a lot trickier because you can't just build a new pipeline overnight and have the gas suddenly redirect to a new customer. So, this is why I'm still skeptical that Russia is going to actually cut off its gas to Europe as leverage. They're probably going to fiddle around the margins. They may push for higher prices. There may be some smaller shut-offs. But to take the whole thing offline would actually cost the Russians a lot. And so, this mutual dependency is part of why I think, prior to Ukraine, most energy specialists sort of assumed this would never be a big enough problem to actually warrant trying to cut off Russian gas entirely.

HANNAH: There is another factor to consider in this story as well. Countries around the world are working to move away from depending so heavily on fossil fuels. Renewable energy might be a big part of the solution to weaken the power of a petrostate like Russia.

ASHFORD: Renewables have the benefit of—sometimes their components come from specific places, but most renewables are sourced pretty close to home. And so, energy security concerns will become much better for importing countries. The bad of it is, if you are a petro state, a very oil dependent state, a very oil wealthy state, and you're not taking steps now to try to diversify your economy away from these things, then you're basically going to be left selling your resources to the lowest remaining consumer. There will be some states that don't bring in renewables as fast, and all the petrostates will basically be competing for those buyers. And then the worst part of it is that many of the foreign policy pathologies I talk about in the book—the things that come from the resource curse that make petrostates foreign policy more aggressive and make the foreign policy institutions weaker—those effects are likely to persist past the point where oil is our main source of fuel. 

HANNAH: In the meantime, President Biden took a stab at addressing the energy crisis. He went to Saudi Arabia to speak with Mohammed bin Salman, the crown prince, with the hopes of convincing him to increase Saudi oil production in hopes that oil prices might go down. 

Interlude featuring archival audio 

HANNAH: To help us make sense of all of this, Emma shared her thoughts with us about the complicated dynamics between oil, power, money, and war. We delved into a lot of difficult questions like: Are we going to be paying sky-high prices at the gas pump forever? And what part of the solution are renewable sources of energy? And does Saudi Arabia have control over global oil prices? 

ASHFORD: Trying to cut Russia out of global energy markets has led to some pretty severe price spikes, because oil can be sort of redistributed, but it doesn't happen instantly. Refineries are set up for certain kinds of crude. Ships go to certain places. And so, it takes months. Not years, but months. And right now we're in this pretty tight oil market as we come back from COVID, as everybody starts traveling again. And then the Russia thing just compounded it. So, that's the situation. And it obviously carries political liabilities for the person in the White House as gas prices soar, and prices more generally soar. 

What I don't understand—I'll just be completely straight with you—is the Biden administration’s strategy here, because while I, like you, have heard people say, “The Saudis are going to announce production increases,” Bloomberg had it just a few days ago from the Saudi Energy Ministry that they are effectively already pumping at capacity. And energy market specialists have been saying this for quite some time. And so, it's a little confusing because it seems like the Biden team think they're going to get something out of the Saudis here that they really physically can't get. And I think this this highlights one of the things I talk about a little bit at the end of the book, which is Saudi influence over global oil markets has declined a lot over the last couple of decades as American production has come up and as production has diversified into other places. The Saudis are still probably the most important producer in the world, but they really can't single-handedly affect the whole oil market the way they used to. They're just much less important than they used to be. 

HANNAH: So, Emma, what's missing, then, in the national conversation around oil? What I'm gathering from your answers here are that we, as in the public, might have a false sense of Saudi Arabia's power and its ability to change the course of this energy crisis. So, what are we getting wrong? 

ASHFORD: Well, first of all, I honestly would like more mainstream coverage of the things people in the energy space are talking about and have been talking about for a long time, because I think the business community actually has a fairly clear view of what's going on. But Washington—sort of my perspective—I find, is stuck thirty years behind on energy security questions. They just haven't really adapted their view from where we were in the late Cold War to today's realities, where America is a much bigger producer. And to the extent that they have compensated for it, they've swung almost too far the other direction—that it no longer matters at all what happens in international energy markets. Like President Trump once said, “The goal is American energy independence.” And I hate that phrase because it is completely meaningless, because we can produce all the oil we need, but the price is still going to be dependent on what happens elsewhere in the world. And so, it would be nice, I think, if we could get a slightly more nuanced understanding of energy security, because it seems like people are either still stuck in the 1970s, or saying energy security is just not a problem at all. A happy medium would probably be better. 

HANNAH: You say Americans are stuck thirty years behind on energy security questions. What do you mean by that? 

ASHFORD: The 1973 oil crisis is utterly infamous. So, anybody who lived through it will tell you how they had to go and get in a line with their car to get gas at the station. The lines would be around the corner. There would be no gas. Everything was rationed. And it sort of lives in the public memory as this very psychologically traumatizing moment. In the early ‘70s, we're just getting off the gold standard. The US economy has gone to hell. And then the oil crisis comes in. The Arab states of OPEC embargo oil to the United States. And so, everybody assumes that oil weapon actually works and that America is incredibly dependent on Middle Eastern oil. And instead, what a more nuanced, retrospective story that many scholars have been uncovering shows is basically that it wasn't nearly as impactful as we think. It had some economic impact. Much of the economic impact was caused by other factors like government choice to engage in rationing, and that it's then had this outsize influence going forward on how we think about the intersection between energy and sort of foreign policy. 

Interlude featuring archival audio 

ASHFORD: When Jimmy Carter gave his State of the Union address to Congress in 1980, he postulated something that came to be called the Carter Doctrine, which is basically, he said, “Any country that threatens the flow of oil through the Gulf, we will take steps to prevent that.” And what's really interesting is that was, at the time, intended to send a signal to the Soviets as they were invading Afghanistan, that they should not move further into the Gulf. It was very much about the Cold War, but it ended up becoming the Carter Doctrine. It took on this life of its own as America protects Middle Eastern oil. And so, the 1991 Gulf War, when Saddam Hussein invades Kuwait, oil is a big part of the rationale there. And going forward, America has this very strange protector of the oil status in the region, and our troop presence goes up and up as a result. 

HANNAH: Emma, let's take this back to the conversation about renewables, because if the United States and countries in the European Union had made more of a concerted effort around green energy—let's just say—and perhaps relied less on oil and gas from places like Saudi Arabia and Russia, would we be in these messes today? 

ASHFORD: I would say yes, over the long term, the best answer is absolutely to get off oil. Renewables aren’t as energy security problematic. There are two problems. One is the time horizon is not immediate. We cannot turn and make ourselves an entirely renewable economy in six months. I don't know that we're going to be able to do that in ten years. So, right now, we have to think about how to bolster that for the future while also finding the oil and gas you actually need. Because if you don't, people are going to starve. People are going to lose their jobs. We're going to go into recession. We're going to have gas prices through the roof. And so, you need both things. You need to incentivize the renewables, but you also need to find enough supply of oil for the present. And so, in the US, I would say the Biden administration has done a moderate job on this—trying to encourage production, also talking about renewables. There are places they could do better, but I'll not harp on it. The Europeans, on the other hand, I think, are really making some big mistakes. They are taking nuclear capacity off line—so, making energy prices higher for no reason. They're talking about switching to burning more coal instead, which is worse for the environment. So, there are all these steps, I think, they're taking that are actually making the problem worse. So, the short answer to your question is, yes, we absolutely should encourage renewables, but it's “yes and.” Yes, what do we do right now? It's not, yes, that's the only answer. 

HANNAH: Renewable energy diminishes the importance and the power of petrostates like Russia and Saudi Arabia geopolitically. But, Emma, you write in your book that these countries have what you call soft oil power—kind of like soft power as it pertains to oil—where countries become so dependent on them that this creates a kind of permission structure for petrostates to act in ways that aren't necessarily consistent with American interests or any kind of rules-based order. Besides transitioning to a green energy economy, which, as you mentioned, will take years, what else can we do to remedy this? 

ASHFORD: I spent a lot of time talking about Saudi Arabia in my everyday work, and that's partly because coming out of the book and coming out of this research, the Saudis are the most obvious case where we see a state that has managed to leverage its importance to world markets into this very outsize political and economic profile. They come to the G20 meetings. They get called on by all kinds of important leaders. You don't really see Joe Biden going to talk to the government of—I don't know—Malaysia on a regular basis. The Saudis are different, and that's because of their oil. 

HANNAH: It was the first meeting. Wasn't Saudi Arabia—and Israel—the first meeting Donald Trump took with a foreign head of state?

ASHFORD: It was. Joe Biden was very unusual in that he didn't take a call from the king of Saudi Arabia for quite some time. And I guess that makes my second point here for me, which is that relationship has been shifting over time. We used to really need the Saudis on board. We needed to work with them. We needed to help to protect them as part of our energy security policy. That's been changing in recent years, and the core reason why the US-Saudi relationship has been so up and down in recent years is, I think, that structural factor. It’s nothing to do with governance. They were always very illiberal. They were always bad to women. They always made mischief in the region. But now the question is whether the US should put up with it or not because we no longer need them in the same way we used to. And so, you asked how we fix the super-producer, super-exporter problem. And I don't think we can fix it, but I think we should be very much aware of where it might be going in the future. And that is going to be China, in particular, building ties—they already are—with these states in the Middle East in much the same way the US did during the Cold War, because they, now, are as dependent on these states as we used to be. That's, I think, for policymakers, the big takeaway here: Be aware of what's coming down the pike. The Saudis are shifting away from us already, and they're only going to get closer to China.

HANNAH: So, getting back to current events, the Russian invasion of Ukraine puts European powers in a bit of a schizophrenic position, right? On the one hand, they've kind of become alert to the problem of power politics and the possibility of a Russian invasion into their continent. On the other hand, they're very beholden to Russian imports and to domestic political pressure to try to end the war diplomatically, even if the best terms available to Ukraine aren't achieved necessarily. So, that's a tough position for Macron, for Scholz, for all these European leaders to be in. If you had five or ten minutes in the room with a head of state in Europe, and we're trying to advise them on how to navigate that very tough spot, given your knowledge of international energy markets and given your knowledge of the energy crisis facing the Europeans, what would your advice to them be? 

ASHFORD: That's a really difficult question, because I think you are right. The Europeans are between a rock and a hard place on this energy question. We've seen not just the big importers try to find loopholes for importing. The one example that really stands out to me is Estonia, which has been exporting oil products lately. Estonia doesn't produce any oil. Where do you think that oil is coming from? It's coming from Russia and being relabeled. So, there's all kinds of loopholes and cheating. And these problems are endemic to any kind of embargo on energy. 

But I guess if I was to basically play the devil's advocate with Europe's current policy, which is, “We're going to switch off Russian oil by the end of the year. We're going to switch off gas fairly quickly, though the timeline hasn't been laid out.” I would say back off on the gas threat. Reassure the Russians you're not going to move away from gas as quickly or in the near future, that those channels will remain open because that is the peak point of vulnerability. Maintain the oil embargoes. Get off Russian oil. Think about longer-term shifts to renewables and stuff. But what we've seen with the oil issue in Europe and elsewhere is that the Russians have ended up winning out of Europe's desire to get away from Russian oil. And I worry that in the case of gas, if they take that line and pursue that approach, we're just going to get the same result, and it's going to be even more damaging to European economies. So, my inclination would be to sort of pull back from that. 

HANNAH: What do you mean that the Russians are winning as a result of the Europeans pulling back on oil? 

ASHFORD: Because of the way the international oil market works, it’s because Europe trying to wean itself off Russian oil is creating disruptions in the markets. Certain oil cargoes can't go to certain countries. They have to find new consumers, etcetera, etcetera. And there's all this musical chairs going on. Oil prices are way up as a part of it because some Russian oil is off the market, and the Russians earn more as the price goes higher. So, the Russians are now actually taking in more per month than they did in January of this year before the invasion. 

HANNAH: That's a really interesting point. I assume this is because countries like India are continuing to buy excess Russian oil, right? 

ASHFORD: Yeah, that's absolutely true. And that is because other countries are buying it at a discount and taking it off the market. But the problem is—and there's been some talk in DC about setting a cap on Russian oil prices that would apply globally even to India and China—other countries are not going to accept that. They're not going to go without a fight on that, because as high as gas prices are here, you are talking, in some countries, about potentially provoking civil unrest if you take this much oil off the market. So, this is not just a simple question of why are these countries buying this oil as much as it's a question of we need some Russian oil on the market. Where is it going? 

HANNAH: As Americans continue to try to make sense of the historically high energy prices and the complicated geopolitics behind them, as well as the complicated geopolitical issues like the war in Ukraine and the oil economy behind that. We here at None of the Above hope this conversation has helped clarify some things, shedding more light than heat. 

Thanks, Emma, for talking to us today. 

I'm Mark Hannah, and this has been another episode of None of the Above, a podcast from the Eurasia Group Foundation. Special thanks go out to our None of the Above team who make all of this possible. Thanks to our producer, Caroline Gray, our associate producer and editor Sarah Leeson, and for research and archival support from Lucas Robinson. If you enjoyed what you've heard, we would appreciate you subscribing on Apple Podcasts, Spotify, Stitcher, or anywhere else you find podcasts. Do rate and review us, and if there's a topic you want us to cover, send us an email at info@noneoftheabovepodcast.org. Thanks for joining us. Stay safe out there. Catch you next time.

(END.)

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