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Geopolitical risk is always a major feature of global oil and gas markets, but the interplay of wars without end, powerful non-state actors, and the proliferation of new weapons technologies across the globe is raising that risk. Energy Realpolitik sits down with Council on Foreign Relations (CFR) National Intelligence Fellow Michael Dempsey to discuss a host of risks that might impact the energy sector in the coming years. Topics are drawn from recent discussions by CFR fellows at Columbia University's Center for Global Energy Policy.
What are some broad trends that could influence the energy sector’s outlook in the next few years?
Mike Dempsey: First, it’s clear that the underlying conditions that brought us the Arab Spring in 2011 have not been resolved.
Just consider, according to the most recent Arab youth survey, youth unemployment remains at around 30 percent in the Middle East, and countries in this region by 2025 are projected to have a population of nearly 60 million between the ages of 15-24.
- That’s a sizeable slice of the region’s population, and one-third of them are likely staring at long-term unemployment, especially if regional growth rates stay mired in the 1 to 3 percent range.
- The young are not only restive, they are connected. So, during Iran’s protests in January, Iranians used forty-eight million iPhones to spread the word, and the protests spread to more than eighty cities across the country. In 2009, estimates are that 15 percent of Iran’s population had iPhones; today it’s about half.
- Just ask yourself, would we have imagined last December that protests in countries as diverse as Tunisia and Iran would be sparked by many of the same underlying conditions?
That’s not, of course, to say that there aren’t some positive trends in the Middle East (the increasing influence of women, a renewed focus on education and technology, etc.) but the negative trends are still dominant, in my view, and are likely to trigger rapid, unexpected crises in the future of the sort that we’ve experienced in recent years.
Second, a more serious debate is underway in the Middle East and beyond about the future of Political Islam. This issue is obviously being discussed in Saudi Arabia—with some encouraging signs, but also concerns—and is playing out in different ways in Egypt, Iran, and across the globe from parts of Africa to Indonesia, Malaysia and beyond. How this debate is resolved will obviously have profound implications for future political stability.
Third, if evolving economic and religious trends are shaping global stability, so too is technology. I won’t go into detail on all of the widely recognized positives that flow from recent advances in technology—energy experts certainly know the effects on the sector better than I do—but there are emerging risks that also have to be considered.
- Recall on the security front: a decade ago, the U.S. military was the only country operating armed drones over Iran and Syria. Today, there are more than a dozen countries and non-state actors such as ISIS and Hezbollah that are doing so.
- In fact, during the U.S.-backed coalition advances on both Raqqa and Mosul, ISIS used armed drones against U.S. forces.
And consider press accounts concerning armed drones being used in Syria only three months ago.
- During the evening of January 5 and into the next day, the Russian military reportedly faced two separate swarm attacks using miniature drones against two of its bases. In total, thirteen drones were used by the attackers, each carrying ten bomblets; ten drones targeted the Russian airbase in Latakia, three the Russian naval base in Tartus.
- According to press accounts, the drones each carried an explosive charge weighing about one pound, and included strings of metal ball bearings that were intended to harm individuals in the open.
- There are reports that several Russian fighter jets were damaged on the ground, though Moscow denies this.
- Most of the individual components in the drones, including the motors, are commercially available. The drones used an onboard GPS system for navigation, but again, this technology is easily available for purchase online.
So, is it really hard to imagine in the next few years that similar attacks will be launched at other bases or sensitive oil infrastructure facilities around the world?
And here is the final kicker to the Russian story. To this day, it’s impossible based on open source information to determine who conducted the attack. So, how attractive could this type of plausibly deniable operation be to terrorists or even criminal elements in the future?
One final word on drones, if you’ve ever seen drone races you’ll know that the tiny drones used fly at great speeds—more than 150 mph—and with incredible maneuverability. That type of speed and maneuverability already poses a clear and present threat to those charged with protecting important government and commercial facilities.
And while we are discussing security threats, consider that in Yemen, as many of you are well aware, the Houthis within just the past few months have struck a Saudi tanker in the Bab-al-Mandeb Strait and fired drones and missiles of increasing accuracy and range into Saudi Arabia, producing the first casualty in Riyadh.
- So, how different would the global energy outlook be tomorrow if a barrage of Houthi missiles hits Riyadh? Would that not trigger a broader regional conflict?
- Or how about if Houthi missiles penetrate Saudi air defenses and strike Aramco?
- I don’t mention these threats because I think they will happen, but I, unfortunately, absolutely believe they could.
I could go on about other threats, including cyber intrusions and the long-term threat posed by autonomous weapons, but here is the bottom line: technology is going to make working in the energy sector in the future much easier, but also, in some ways, perhaps much harder.
Fourth, while I am always worried about sudden country-specific crises that could influence the energy market, I’m frankly also concerned about a growing number of transnational challenges and their potential to trigger broader instability. Some of these challenges include the rapid spread of preventable diseases, as well as today’s unprecedented human displacement crisis.
- Today, more than sixty-seven million people (or one of every 110 or so humans on the planet) is a displaced person, which is fueling instability in countries from the Middle East to Western Europe. I fear we are losing entire generations of young people in countries such as Syria, and the long-term effects on regional and international stability will be profound.
- This trend is especially worrisome because it’s largely owing to the international community’s inability to end the conflicts that are driving instability and displacement—witness our seventeenth year of conflict in Afghanistan, seventh in Syria, and fourth in Yemen.
So, conflicts and threats that should be preventable or bounded, now seem to grind along into deeper crises with pernicious effects that we often don’t recognize until it’s too late. Just recall how the flow of people fleeing violence in Afghanistan, Libya, and Syria have affected Western Europe’s political landscape.
This challenge is made even more difficult by the inward turn of Western states. In my view, this is an especially problematic time for the West to retreat from the world stage and to turn its focus inward.
A fifth trend that will certainly affect the energy sector surrounds issues of transparency and corruption.
- The push for greater transparency around the globe is a hugely positive development, in my view, that could eventually increase business and government efficiency, improve governance at many levels, and deepen public confidence in both government and business. As you know, the pernicious effects of corruption are well documented. For example, the IMF estimates that the cost of bribery alone (one subset of corruption) costs between $1.5 and $2 trillion a year, equal to about 2 percent of global GDP.
- This cost has been evident in many countries for some time. Venezuela is a good example of this, where PDVSA has been raided for years both to pay for government expenses and as a patronage cash cow, all while the company’s infrastructure was neglected.
- Indeed, the fight against corruption is now a first-tier issue in countries of significant importance to global energy markets, from Brazil to Mexico and from Nigeria to India.
- In the short-term, the anti-corruption fight could generate increasing political instability, but if it eventually leads to more transparent and better governance in these countries, I’m certain that it will invariably help their economic performance in general, and the energy sector in particular.
So, in my view, these are five critical trends that will influence the world’s energy market in the coming years.
Are there any current developments that you are following that could influence energy prices in the near-term?
MD: Sure. These include the outlook for the Iran nuclear deal after May 12, the prospects for the upcoming U.S.-North Korea Presidential Summit, Libya’s lack of progress toward political reconciliation and the recent terrorist activity against the country’s energy industry, and the ongoing negotiations concerning the global trade agenda, especially the near-term outlook for NAFTA.
How do you then view geo-strategic trends and the likely effects on global energy prices over the next year or two?
MD: I’d say the geo-strategic backdrop for the near-term leans heavily toward increased risk, with the potential for worrisome surprises—and potential oil flow disruptions—across a range of countries including Iran, Libya, Nigeria, Venezuela, and Saudi Arabia. But I hope I’m wrong!
Do you have any final advice/tips for energy analysts or those tracking the industry?
MD: Yes. In my view, the international environment is quite fraught at the moment, which means it would be a good time to:
- Routinely challenge your underlying assumption about the energy market. There are enough gathering threats (from simmering regional conflicts that have the potential to spike on short notice to asymmetric threats such as cyber and other non-traditional weapons) that this isn’t a good time for analytic complacency.
- Think deeply about the quality of leadership and governance in the countries you’re following. It’s always amazing, after the fact, to examine how signals were missed and how seemingly stable countries (and companies) can experience unexpected periods of profound turmoil. As a useful exercise in humility, for example, it’s worth going back and reviewing the leading investment banks’ economic forecasts in 2006-2007, right on the eve of the Great Recession. In both the intelligence and business sectors, then, it’s worth remembering that it’s easy to develop analytic blind spots, fall victim to straight-line analysis, discount worrisome alternative scenarios, and underestimate critical drivers of change.
- Along these lines, I really would encourage everyone to look hard at physical and data security issues and to constantly re-evaluate how they are postured against the next generation of challenges.
- And finally, I would urge folks to think broadly and systemically about the issue of risk. Is protecting one particular company good enough today? Or do industry leaders need to cooperate more in protecting the whole system they operate in? For example, if a cyber attack cripples one energy company, isn’t it possible that attackers will learn from that experience and attack others, and that the public’s confidence will be undermined in all parts of the industry? The issues we face today are less about competitive advantage than about preventing systemic risk or failure.