Geopolitical Implications of the Oil Price Plunge

Monday, February 23, 2015

Event Description

Michael Gfoeller, advisor at The Chertoff Group, David Goldwyn, president of Goldwyn Global Strategies, and Angela E. Stent, professor at Georgetown University, join CFR’S Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment, to discuss the geopolitical implications of low oil prices. The panel analyzes effects on major gas and oil-exporting countries including Russia, Iraq, and Saudi Arabia, their regional relationships, and policy ramifications for the United States.

This meeting is part of the Geoeconomic Consequences of the Oil Price Plunge symposium, which is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

Event Highlights

Michael Gfoeller on policy advice vis-à-vis the oil price plunge:
“…in this lower-price environment there's going to be a lot of internal stress on the social-political models in the Gulf, which, despite the growth in U.S. oil production, is still of huge importance to us strategically and to our trade partners and our allies. …I would advise…to plus-up the American diplomatic and intelligence network in the Gulf states.”

David Goldwyn on the United States’ increased oil production, and energy interdependence:
“…we have this reserve ability to respond within a reasonable period of time to global market signals. So I would like to see us in a world where we are connected to the market and where we use this as a source of foreign policy power, where we can use our strategic reserves to export oil to others or we can tell the Japanese or the Koreans they can rely long term on U.S. supply if they want to buy it from us, and where we are when we are looking for other countries to reject Iranian supply, and we're talking to the Indians and the Chinese, we can say, “we're not just telling you don't, we're telling you we're going to contribute to the solution by exporting”.”

Angela E. Stent on Russia and the possibility of a unified energy policy in the European Union:
“…the Kremlin has been picking off several European countries that are more favorably disposed towards Russia to in fact entice them into new energy deals. So I would be rather skeptical based on the historical experience of the Europeans really getting together and having a unified energy policy, particularly when it comes to Russia.”

LEVI: Good afternoon. Welcome back to this symposium on the geoeconomic consequences of the oil price plunge. This is our third and final session on the geopolitical impact of low oil prices.

I was thinking back earlier today to a wonderful passage in Dan Yergin's book The Prize, during the 1973 oil crisis. And Henry Kissinger is being briefed on what's happening in energy markets, and he suddenly cuts off the briefer and he says, stop talking to me about barrels of oil, they might as well be bottles of Coca-Cola.

We are fortunate to have three experts on geopolitics who are comfortable talking about barrels of oil with us this afternoon. In Washington D.C., Angela Stent, professor at Georgetown University, previously the national intelligence officer for Russia and Eurasia, the National Intelligence Council, among other distinguished posts. She is the author of The Limits to Partnership: U.S.-Russian Relations in the 21st Century which was published last year.

To my immediate left is Michael Gfoeller. Ambassador Gfoeller served in a wide range of places over a twenty-six-year career, including in several that are highly relevant to today's discussion, in Iraq, in Bahrain, in Russia, and as deputy chief of mission in Riyadh.

To his left is David Goldwyn. David is president of Goldwyn Global Strategies. He served as assistant secretary of energy for international affairs during the Clinton administration and more recently as Hillary Rodham Clinton's special envoy for international energy affairs at the State Department in this administration. He is co-editor of Energy and Security: Strategies for a World in Transition.

Angela, I'm going to go straight to you. If you look at the geopolitical headlines that have come out of the oil price collapse over the last six months, they have been dominated by Russia. Has Vladimir Putin been forced to change anything about his international strategy so far because of the drop in oil prices?

STENT: So the short and the long answer to that is no. And it's not just the oil prices. I mean, Russia has been hit by a trifecta of blows. The first one was that this is a poorly managed economy. It was spiraling downward even before the Ukraine crisis. It's manual control, as the Russians like to call it.

Secondly, you then have the oil price precipitous fall, which then led to precipitous devaluation of the ruble, falling the value of the ruble, which is worth half of what it was a year ago.

And then you have the Western financial sanctions which have basically cut Russia off, more or less, from international financial markets. Plus the Western sanctions have targeted the energy industry. The U.S. sanctions have targeted technology transfer. ExxonMobil, for instance, and Rosneft can no longer explore the Arctic together at least as long as these sanctions are there.

A few more statistics: $150 billion of capital flight last year from Russia. Minus 5 percent growth they say is the figure for this year, it could even be more than that.

Moody's, Standard & Poor have said that they downgraded Russia to junk status, et cetera, et cetera.

So the economic indicators are terrible. The oil price is an important, but not the only part of it. It's a conflagration of all these things.

But so far, they have had no impact on what Russia has been doing in Ukraine. And that is partly because those members of the business elite who oppose these policies have more or less left and they've taken their money with them. And the business elite that stays in Russia, and I can mention someone like Alexei Mordashov, the steel tycoon who used to own steel factories in the United States, they have declared their patriotism. Many of them have brought their money back to Russia and they are overtly supporting President Putin.

And so at the moment, contrary to maybe what most people in the West thought, economic pain has not caused the president of Russia and those around him who are advising him in this crisis to alter their policies.

LEVI: So does that last forever? If you imagine, let's say, oil prices staying low for the next six months, for the next year, for the next two years, is it just more of the same politically in Russia in terms of foreign policy strategy? Or do you start to see fissures among the elites, do you start to see shifts in Russian foreign policy?

STENT: Well, that is the 64,000 ruble or maybe 32,000 ruble, now that it's devalued, question. I think most people believe that you're not going to see a major change for some time.

Now, let's remember that the people who felt most of the economic pain are the urban elites who, you know, can't have their imported mascarpone cheese anymore and who have been going out on panic buying spells to get consumer durables.

But the vast majority of Russians who support President Putin live in the provinces and live in rural areas, and their standard of living wasn't that high to begin with and they have not really felt the pinch yet.

Unemployment is around 5 percent which is a fairly good figure. If that gets worse, if inflation gets worse, then you could—then the pain could be much greater, the economic pain around the country.

But as we all know, Russia has a tradition and its people have a tradition of muddling along, of muddling through, of enduring lots of privation and economic pain. And at the moment, the patriotic fervor—and don't forget that the electronic media are really controlled by the government—the message is very much on target, it's very anti-American, it's blaming the West, the U.S. and its Fifth Columnists in Russia. As long as that message continues and doesn't abate, people are not going to go out in the streets.

And again, you have this kind of patriotic business elite. And I think if we thought in the West that by sanctioning some of President Putin's close friends and business colleagues that they would somehow get together and think, ah, we have to change the government here because it's affecting us badly, I think that was a miscalculation.

So you could feel effects, something maybe could change in a year, a year or two, but I don't think we're going to see that anytime soon.

LEVI: So had we had this discussion nine months ago, one of the things we would have been puzzling through was how aggressive Europe could or couldn't be toward Russia in this confrontation. And one of the things we would have talked about was Russian leverage over Europe because Russia controls a lot of European natural gas supply.

One of the pieces of fallout of the oil price crash is that natural gas on the broader market is cheaper because a lot of natural gas sales are indexed to oil prices.

Is there an impact from the oil price crash on Europe's vulnerability to Russian energy leverage and to Europe's perception of vulnerability to Russian energy leverage?

STENT: I mean, that's a great question. It's hard to decouple that from the general, you know, European business integration with Russia. I mean, Europe and Russia do have very strong business ties. And so you put that together with the energy dependence, I mean, Russian gas—and I think oil isn't the issue here, it's gas—it constitutes about 25 percent of the European market. Some countries are much more dependent on Russian gas. And the closer you get to Russia, the more dependent they are; the further away you get, they're less dependent, although Germany gets about 40 percent, for instance, of its gas supplies from Russia.

At the moment, I think the perception of vulnerability is there, but there hasn't been an actual experience of it. I mean, Russia used the gas lever, it cut off gas to Ukraine at the beginning of this crisis, it's not being restored, but in a few weeks, the agreement that Russia and Ukraine and the EU made together ends and so I'm not quite sure what's going to happen then.

So there's consciousness of potential vulnerability, but I think at the moment the situation is stable. I think the Europeans in general, or many Europeans, say we should try and become less dependent on Russian gas, but there are no immediate alternatives to that, and things like LNG, you know, that takes some time and it's not going to be cheaper.

Then the thing that Russia is doing now already as part of Putin's policy is to reinforce the fissures within Europe about how to deal with Russia. Those disagreements are there, but they can also be reinforced and strengthened.

And so you see Putin in Hungary last week signing a nuclear power deal with the Hungarians, offering some new gas terms. Countries like Cyprus, Greece with a new government, who say, well, we should be more integrated with Russia, we shouldn't fear this dependence on Russian energy.

So that could come in the future. But at the moment, it's a fairly stable situation.

LEVI: David, you recently were speaking with some major investors in Russia. And historically, energy investors in Russia have been advocates of positive relations between the United States and Russia. Does the oil price collapse make them more eager to see positive relations because every penny counts and every bit of uncertainty counts? Or does it make them less interested because a lot of the prospects there aren't as attractive anymore?

GOLDWYN: I think they remain as interested as they ever were, and part of that, if you're talking about the U.S. international oil companies or if you're talking about the major European ones, they still have very large-scale LNG gas and oil investments in Russia. They're not affected by sanctions; and therefore, they want to protect the sum costs of those assets.

Second, the upside in Russia remains tremendous and companies which take a thirty-year view are hoping for change, they're hoping that Putin will stop. And I think the ones who are looking at the unconventionals or they're looking at the offshore are hoping to get back.

So right now they are hopeful, and that's probably going to last for about two years. And after about two years, the teams that are looking at those new investments are going to disband and go to other places. And then it's just going to be like the companies are in Nigeria, maintaining what they've got.

LEVI: So Michael, when people started trying to sort out the consequences of the price drop, Russia was the first country they turned to, Iran was the second. These are the two oil-exporting countries that the United States is in acute confrontations with right now. What impact do you see of the oil price plunge on Iran's willingness and ability to engage in the ongoing negotiations with the United States?

GFOELLER: I think actually it's marginal. I think that Iran's interest in maintaining its nuclear program is such and its political commitment is so strong that something like the collapse of oil prices last year remarkably enough isn't going to have much of an impact on it.

I think it'll have a much bigger impact on Iran's regional policy and its ability to fund non-state actors like Hezbollah, like the Iraqi Shi'a militias, like the Shi'a militias operating on its behalf in Syria right now. That's where we're looking to see the impact on Iran's policy because these things cost money, of course. Iran's oil production has gone from 2-1/2 million barrels a day down to a million barrels a day, and it's gone—let's see, prices have plunged about 60 percent now. So they're hurting badly.

In addition, Iraq's oil income has plunged by around 60 percent, mostly due to the falling prices. So Iran's ability to leverage Iraq's oil income, which was happening to a considerable degree, although it's very hard to track, has been reduced as well. So I think that's where you're going to see the real impact.

Iranian strategy on nuclear negotiations is to reach an agreement while preserving as much as possible their current nuclear infrastructure intact. I don't think that goal has changed. And frankly, I think, given the way the negotiations have moved so far, they'll probably get an outcome they can live with.

LEVI: And give us a sense quantitatively what fraction of Iranian government spending goes to supporting Hezbollah, Shi'a militias. How material is this to them as they try to grapple with their budget challenges?

GFOELLER: Well, there are no public figures, but it's an enormous amount of money. And Iraq has been particularly useful for them in this regard. There are reports from time to time of Iraqi oil shipments that appear to have exited Basra, made their way through the Mediterranean to the Suez Canal, which crosses from the Gulf of Suez to the southern Mediterranean shore, and then tankers chartered by third parties, normally through the one remaining Syrian refinery at Tartous, you'll see fragmentary accounts from time to time. By the nature of the case, there's no hard data.

But certainly, maintaining the 800,000 estimated Iraqi Shi'a militiamen who have been raised since last summer in response to the ISIS crisis isn't cheap. And so we're talking billions, not millions.

LEVI: Let's talk a bit more about Iraq. You've had struggles within Iraq to get the oil industry on solid footing. You've got struggles over who gets the revenues. What does the lower oil price do to that? And what are the consequences for Iraqi internal stability?

GFOELLER: Well, it's all negative, unfortunately. I mean, the budget this year is about $103 billion, it's almost totally funded by oil revenues. They're looking at a $35 billion budget deficit, that's the initial estimate, it could be larger depending on what prices do.

Right now, prices, as you know, are between $49 and $59 a barrel depending on the type of oil and the market. So the Iraqi break-even price had been over $100 a barrel, various estimates on that ranging from $107 to $127, so they're looking at a considerable deficit, even though their extraction costs are very low. They have enormous social costs, some 80 percent of the labor force works for the state, one way or another.

The same thing is true in Kurdistan, so the Kurds have been equally hard hit.

One of the big impacts in Iraq has been that the December 23rd agreement between Erbil and Baghdad over oil production sharing whereby the Kurds agreed to export a total of 550,000 barrels a day. That includes Kirkuk's production and northern Kurdistan's production, together through the new pipeline, the Ceyhan. This agreement isn't really operational at this moment because the 17 percent of Iraqi budgetary revenues that are supposed to be transferred to Erbil every month have not been transferred because the money isn't there at this point.

And from what I understand when the Abadi government took power, there was very little left in the till and so they haven't been able to pay the $10 billion in arrears they owe the KRG from last year, let alone the 17 percent of monthly revenues they owe them now, which comes out to about a billion-and-a-half a month.

So it's tight times in Kurdistan as well as in Baghdad right now. And of course, this affects the ability of both the KRG, the Kurdish Regional Government, and the Iraqi central government to fund the war against the Islamic state.

The Islamic state's revenues—this is the only bright side I can find in the picture—are down, too. They were selling oil at a steep discount in the enormous black market on oil that runs from southern Turkey into Iran. Regionally, you know, there are hundreds of these small black market refineries here and there, and they were making a good chunk, most of their revenue from that. Estimates range from $800 [million] to a billion a month, so considerable amounts of money.

But you know, at this point they're not doing that. They're taking a steep discount on their discount. That's about the only light one can see in the situation, it's tougher for the Islamic state too.

LEVI: David, do you have any other silver linings on Iraq? Or is it as gloomy as Michael says?

GOLDWYN: I think pretty much as gloomy as Michael says. I mean, what's interesting is that after years of trying to get the Baghdad government to be more inclusive, to recognize the Kurds', you know, semi-autonomy, they've taken that step and they've let them have their own framework. And that could be a great thing for national unity and stability in Iran.

If they don't pay them and the deal breaks down, then what they have done is they have recognized the ability of states essentially to break off, develop their own oil and sell it. And Anbar and other provinces are going to want to do that, too. So if they make good on the deal, this could be a bright spot for the unity of Iraq.

If it fails, it could be a very significant centrifugal force in the disintegration of Iraq.

LEVI: Angela, Michael talked about this break-even oil price for Iraq. And anyone who has opened a newspaper at some point in the last six months has seen a chart of break-even oil prices for countries showing their threshold where they incur extensive budgetary pain.

I want to actually ask each of you, but I want to start with Angela, how seriously should we take those numbers? How hard are those numbers? When we hear that Russia has a $96.32 break-even oil price, and I may be revealing a bit of my bias here, how hard is that, how long does it take them to adjust?

STENT: Well, all I can recount is that a year ago Russian officials said they needed $100 a oil in order to balance their budget and for the economy to function well. Well, then the price kept going down, and a few weeks ago President Putin said, you know, if oil is $20 a barrel we'll be fine, we can adjust.

So I'm not quite sure how they work out all these numbers. And so I would have a very hard time saying what the break-even price is. Maybe David may have a much better answer to this.

LEVI: David, are these moving targets?

GOLDWYN: Well, I mean, use a U.S. example. Instead of having the sequester, say we're looking at a 40 percent budget cut in the U.S. budget. Could you handle it? Yes. Would it be disruptive? Absolutely. Would you have a little bit of fight over the distribution of those cuts? In a serious way.

And so this is—when these governments are talking about what their budget price is, they've estimated a budget price and that's what their spending is going to be. That budget gets cut in half; whose ox gets gored? That's really what the question is. And countries which have very fragile legitimacy—and we can come back to Nigeria and to Venezuela—where the only reason, you know, a government is in power is because they're delivering the goods to their class, you stop delivering, your legitimacy comes into question and you risk some serious instability.

And so I think when you talk about budget prices north of $100 in Libya, in Iraq, you know, in the northern Gulf, these governments face some very serious challenges on whether they're going to provide social services. Now, there are opportunities for savings, a little less corruption, maybe a little gold-plating, you know, so there's a little bit of wiggle room in there, but you're talking about a very different service delivery, you know, position on the part of the government.

LEVI: So Michael, one thing I think we know is that in Saudi Arabia, whatever their break-even price is, they have enormous amounts of money in reserve. And we talked about that a bit in the previous panel.

So if you look out over, let's say, the next year, they don't have to change anything if they don't want to. But let's imagine that we have prices settle somewhere around where they are now for the next five years and if Howard's range of $20 to $112 is right, that's certainly possible. What sorts of changes do we start to see in Saudi foreign policy over time? And do we see any stability challenges in Saudi Arabia if the low price sticks for more than the next six months or one year?

GFOELLER: Well, they have enough reserves to stick out even a pronounced decline in the medium term. So the next three to five years they have the reserves to handle it.

If you get past five years, and that's possible because if you look at the history of oil prices—I mean, and one of the reasons they won't cut prices right now, and not to dwell on this, is that production right now is that back '80 to '85 they did cut production from ten million barrels a day down to 2.4 [million] and the price went from $35 a barrel to $10. So when prices go low, they can go low for a long time and they can sink even further. And people in Riyadh with long memories, and that would be everyone in the Saudi elite because they've all been in power for decades except for some of the younger princes like Mohammed bin Salman is the only young fellow in the group, they remember this vividly, especially a fellow like Ali al-Naimi.

So they're thinking about it. They're saying, gee, what if we're in for another ten years of really low prices? And to give you an example, when I washed up in Riyadh after my year-and-a-half in Iraq in 2004 I, you know, as the political consul and the chargé, oil prices were $20 a barrel. And so what was happening then? Contractors weren't being paid, the government contracts and projects were being stretched out in terms of implementation timelines to a considerable degree. Nothing really stopped, but the machinery moved very slowly. So I think that's one of the things you'll see.

You'll see a prioritization of spending. You're seeing that already. Last year, the kingdom announced plans to build new soccer stadiums everywhere, it was one of King Abdullah's ideas, something for the youth to do. All those plans have been quietly shaved—shelved, rather.

More importantly, the Saudis were planning to add 74 gigawatts of renewable energy capacity, and this is a really big, strategic investment, by 2032. Now, that time line was just extended a few months ago to 2040. So why is that important? It's important because they're burning 3 million barrels a day of their own oil right now minimum, some say 4 million, and that's a worrisome trend because it was only a million-and-a-half barrels a day fourteen years ago.

But if the trend continues by 2030, they could be burning 6 to 7 million barrels a day and then you won't have the exportable surplus. And if prices are still low at that point, we're talking about cracks in the social contract.

The thing about the Saudi social contract is it's based on the fact that the kingdom is, at the end of the day, an Islamic-Arabic monarchy. It's a very traditional state despite the modern technology and all the rest of it. So the population expect, in return for their acquiescence in the rule of the Al-Saud, really substantial material benefits, free electricity essentially, free water, free health care and free education at the university level. If these things start having charges attached to them, it'll change the political dynamic in the kingdom.

So I was talking to a Saudi economist friend once several months ago and I said, what would the political implications be? And he said, well, you know, we don't like to talk about politics or economics here, but at the end of the day if there's going to be taxation there will have to be some sort of representation for the people in the political process. I said, how do you mean? He said, well, there can't be taxation without representation. I said, you know, to me as an American that really resonates. He said, really, why?


I mean, you're going to be looking at a changing political dynamic because the balance of power between the rulers and the ruled will shift.

LEVI: David, from one crazy political system to another, let's talk about Venezuela. I don't even know that we touched much on Venezuela in the economics panel because the economic discussion was relatively obvious: it's extraordinarily painful.

But let's talk about the political fallout from that. Is political change in Venezuela a matter of 'if' or is just a matter of 'when'? And how much is the fall in the oil prices contributing to what we're seeing there?

GOLDWYN: Well, let me take those in reverse order. Venezuela was in deep trouble a year ago. They had, you know, militias guarding the stores because there was a lack of consumer goods. And Venezuela is a country where something like 90 percent or 80 percent of consumer goods are imported. Ninety percent of the government's revenue comes from oil. And the foreign exchange system is hugely contorted. So they're running out of foreign exchange.

Now, you accelerate that by cutting the oil price in half and you're in deep crisis. You have the inability to import, you know, basic consumer goods. And the political bargain for Chavez's party, the PSUV, was, you know, for him partially based on charisma. But it was based on delivering services, health care, education, money, social services to a large political class.

When that bargain disappears, President Maduro doesn't have the same charisma by any stretch of the imagination. And then their reason for being there and being in control and tolerating this political oppression kind of evaporates.

So they were in crisis before, now they're in deep crisis.

The problem of political change in Venezuela is a different question, though, because Maduro may or may not last, but the person you get after Maduro is probably going to be someone from the PSUV. The opposition, Mr. Capriles, while he nearly won an election, doesn't have a message that speaks to the masses that the PSUV speaks to.

So, one of a couple of things could happen. You get somebody who's worse than Maduro who comes in and comes in relatively quickly. Maybe you have the opposition win the parliamentary elections in July and then maybe you have mass demonstrations calling for a new election. You know, or maybe, you know, you get somebody who comes out of the opposition who can, you know, be a popular leader. I think that third option is very unlikely, so I think we're looking at more of the same.

And the big changes that have to happen, basically getting prices right in the economy, unlikely to come from this president.

LEVI: And what about the regional spillovers? We've had a nod to Petrocaribe, the system that Venezuela uses to support some in the region. When should we anticipate spillovers more broadly in the region? Do we see other things like the U.S.-Cuba agreement that a lot of people claim was in part spurred by Cuban anxiety about a potential withdrawal of Venezuelan support? Are there other things we ought to be watching out for regionally?

GOLDWYN: Things are already changing. Petrocaribe, for the uninitiated, was actually a credit scheme, is a credit scheme, which provides governments in the region with either crude oil or product at retail prices, but it loans the government the money to buy them, so you only pay 20 percent down, so it's an enormous credit support to the government.

And so if that support disappears, they can still buy product on the open market, but you blow an enormous hole in their budgets. And so for Jamaica, for the Dominican Republic, for Nicaragua, for Cuba, this is an enormous source of support. So it has already changed, the credit terms have gotten shorter, the interest rates have gone up, the quantity of product delivered has shrunk, and Venezuela has started a fire sale on debt.

It has offered to sell basically debt owed by some of these Caribbean countries at fifty cents on the dollar. The Dominican Republic bought back its debt basically at fifty cents on the dollar. So the future of this credit support is already eroding and likely to be gone except for Cuba which will be last, and Nicaragua which will be second-to-last.

And so it's a serious risk which our government ought to be taking a look at and trying to help ameliorate. But it's also an enormous opportunity for the Caribbean, because essentially what they've been getting from Venezuela is diesel and fuel oil and so they have the highest-cost electricity in the hemisphere, they have the highest carbon electricity in the hemisphere, and the Inter-American Development Bank has done a study that said if they converted to natural gas they would cut their electricity prices and their carbon in half.

So they've got a little bit of a credit risk issue in terms of, you know, who's a credit-worthy off-taker, can you buy that down? But this could be an enormous boon for the Caribbean. But if we don't step in and nobody else steps in, then they'll be looking at a serious credit crisis.

LEVI: So David, you're talking a bit about the regional implications.

And Angela and Michael, both of the countries that you've each focused on in your remarks, Angela, Russia and, Michael, in your comments on Saudi Arabia, also support a variety of countries in their regions.

Angela, can you say a bit about what the consequences are that we might see in Russia's backyard if Russia feels compelled to spend less in support of other governments?

STENT: Well, there's certainly a regional chill already. You may remember that one of the reasons why the Ukrainian crisis broke out is because then President Yanukovych was contemplating signing an association agreement with the European Union, which would have meant that Ukraine could not have joined the Eurasian Union.

So the Eurasian Union is Putin's big project for his third term. It was signed into being on January the 1st of this year. It was an outgrowth of the customs union, so currently it has Russia, Kazakhstan, it has Belarus and Armenia. Kyrgyzstan is set to join, maybe Tajikistan. These countries, of course, are quite poor.

And so what's happened? Well, the Kazakhs, I think, are particularly important here. They were always a little bit wary about the political implications of the Eurasian Union, although they were the ones who were very much in favor of a customs union. But Kazakhstan is now suffering obviously from falling oil prices since it's a major energy producer and exporter, but also it's suffering from the devaluation of the Russian ruble from the fact that the ruble is worth much less, and therefore, Russian goods are much cheaper on the Kazakh market. So the Kazakhs are now thinking, do we have to devalue our own currency, the tenge?

Then another problem is that part of the big project that President Putin's been speaking about vis-a-vis Ukraine is the Russian world, that Russia has a right to defend all ethnic Russians and people who identify with Russia, who live outside of the borders of the Russian Federation, this tragedy that happened when the Soviet Union broke up and all of these Russians and Russian speakers were no longer living in their own country.

Kazakhstan still has about 30 percent of its population that are Russian. It's very interesting that the Kazakhs have suddenly moved up their presidential election. Although President Nazarbayev is in fact president for life, they're still having presidential elections, so they've moved that up. And one of the reasons people are now saying is because they're very worried about their internal stability given the economic weakening and the chill that has come from falling oil prices and from all the other economic problems that Russia is having.

It's also true from Belarus which is also having, not second thoughts about being in the Eurasian Union, but is looking increasingly also westward and has tried to be a mediator in some of these talks.

So I would say, particularly for those countries, Russia's neighbors that are much poorer than Russia and that depend on Russia, migrant labor is another thing. You know, large numbers of people from Central Asia, the remittance—and also from countries like Georgia and Armenia—the remittances that they send back home from working in Russia help support the economy of those countries. Well, those remittances are shrinking and so that whole issue is also in question.

So there are major ripples and there will continue to be if Russia's economic situation continues to deteriorate partly as a result of the falling energy prices.

LEVI: Michael, how about countries that are dependent on Saudi Arabia?

GFOELLER: Well, again, in the short-to-medium term, so for the next one to five years, the Saudis aren't going to change any of the core policies they're following right now. They have to focus on the security challenges on their borders. So what are those? There's too many to mention actually. The recent collapse of the Yemeni government, the fact that the Houthi movement which has close ties to Iran has taken Sanaa.

The collapse of Yemen, of course, has also meant that the hand, as it were, of al-Qaeda in the Arabian Peninsula has been freed, to a large extent, so the Saudis are really worried now about a double-barreled threat coming at them from Yemen in the form of increased AQAP infiltration and parish attacks in the kingdom.

And there are irredentist claims by the Houthi movement which really, when you look at the Houthis, is a difficult thing to understand if you haven't spent much time in Yemen.

But what they're really looking at is the reestablishment of an al-Mutawakkal-like kingdom which existed in what's now southwestern Saudi Arabia and north Yemen down until the 1930s, when it was conquered by King Faisal who was then Prince Faisal.

At any rate, big problems in the south. Very difficult problems for the Saudis to handle because they're twined with the tribal network. The Saudis have limited leverage there. Without a stable state structure in Yemen right now, it's very difficult to find partners for them to talk to. And militarily, this kind of insurgency is something that's way beyond the Saudi armed forces' ability to handle.

So what they're looking at right now is spending billions on the southwestern border, to armor it, to put in border guard bases. The ministry of interior that Mohammad bin Naif, the deputy crown prince heads, is focusing on that big time.

And then there's the threat from the north in Iraq. They've always worried about the extremely close ties between the Iraqi government and Iran and about the strength of the Shi'a militias in the nine southern provinces of Iraq that are predominantly Shi'a or Shi'a militias have a huge presence. That presence is even greater now than than before.

And now they will also have to worry about the Islamic state which is on their northern border as well and which is becoming active in cities like Zarqa and Ma'an in Jordan. So around the perimeter they've got these issues.

In Bahrain in the eastern province, they have the ongoing Shi'ite insurgencies which are kind of on a low boil, but can be stepped up very quickly.

So the Saudis have a lot of money that they're spending on these issues through the ministry of defense, through the national guard, through the ministry of interior in particular. They can't really cut these expenditures in the short run.

Until the oil price crisis began, they had an enviable financial position, government that was only 2.5 percent of GDP and reserves were 101 percent of GDP, so they can borrow if they have to. This year, they'll run a government budget deficit for the first time in years. They'll borrow some and they'll use a small amount of their reserves, and they can continue to do that for, I would estimate, another five years at least.

If low prices continue beyond that, they're going to have to start prioritizing. One of the things that might be hit is their subsidization of Egypt. Egypt is incredibly important to them. They consider the fall of the Morsi government, which was Muslim Brotherhood dominated, to have been a major geopolitical win for them.

They know how fragile Egypt is politically and economically and how fragile the Sisi government is, so they're going to continue to make substantial investments in that government. But five years out they might have to think about stepping that support back if this low-price environment continues.

LEVI: David, we've talked about four of the five biggest oil exporters in the world and I don't want to get close to the end of the conversation without bringing in the fifth which is Nigeria.

We've seen a postponement of the Nigerian election. The headlines are about Boko Haram. And it's tricky, particularly for someone who doesn't focus on Nigeria frequently, to figure out how the oil price collapse plays into what's happening there, if it does at all.

Can you help us untangle this? How does it feed into what's happening in Nigeria?

GOLDWYN: I'm not sure that it does feed in other than it further undermines the legitimacy of Goodluck Jonathan's government.

You have to understand how the Nigerian economy works. You've got the formal part of it where the money that comes in from the international oil company's sale and marketing comes into the formal budget and then you have the government's share of oil sales, which it more or less sells at sea and that goes into the ruling party's personal distribution system. So that is a form of economic distribution; corruption is a form of economic distribution in Nigeria.

So when the oil price drops, the formal budget gets cut and those who benefit from it, almost none of whom are in the north of the country, suffer less, and the southern states, which are producing states, get a special derivation, a special percentage on top of it, formally get less money.

But what the government does is it keeps producing. In fact, oil production in Nigeria is up very slightly and that's because during an election campaign they are going to pump it and sell it for as much as they can, because even if it's at a discount it's funding the election campaign.

How does this all feed into Boko Haram? Well, Jonathan's legitimacy has been compromised because of his inability to manage or the way he has mismanaged the insurgency from Boko Haram, and this has enabled Buhari, a former dictator who was left out of power, to stage a campaign where he is now neck-and-neck with Jonathan.

And so I think the oil price just makes Jonathan's mismanagement look worse than it is. But there may be relief on the horizon. The African Union's got an 8,700-person multinational force which may help combat that insurgency. So it really depends on what happens between now and March 28th when the election comes around.

It's possible that Jonathan will slip through, or it may be that he seems so incompetent, even to those in the central states, that a quasi-legitimate election takes place and Buhari wins.

But I think the oil price only is a complicating factor, but I don't think it's determining in terms of Boko Haram.

LEVI: David, I have one more question for you, and there's no natural pivot here. We heard in the last session about the market impacts of low oil prices on alternative energy sources, on oil consumption. I want to talk a little bit about the political side of this.

We have the Paris climate talks coming up at the end of this year. The president has a fairly aggressive regulatory agenda on climate. How, if at all, do the low oil prices affect the politics of taking action on climate change here and internationally?

GOLDWYN: Well, I think in theory it's helpful and in practice it may not be. So in theory, the cost of adjustment, particularly in the electric power sector, is lower because oil prices are lower and to the extent natural gas prices are linked to oil prices, those are lower also.

So if you look around the world and say who's got to change their power sector and change it from kerosene and fuel oil, say, to natural gas with some backup from renewables, well, that's Mexico, that's a good part of Africa, that's all of the Caribbean, that's a number of other countries.

And so theoretically when they announce their national targets, it's cheaper to get there. So I think that's the good news.

What we heard earlier—in earlier panels—is that governments are having the political courage to reduce subsidies, not only in the electric power sector, but also for petrol, for gasoline, so that will limit the rise and basically enable them to reach their target more easily.

So that's the theory. And a place like Mexico, you can see where this is happening right now, because by bringing in cheap U.S. natural gas they're about to put all of their fuel oil power plants out of business and convert them to natural gas. Electricity prices have already dropped. Carbon emissions are already dropping. And this only with two of seven pipelines put into place.

So cheap gas is enabling climate change to happen and they will meet their mandatory target more easily. That's the good news.

The bad news is that the business case for renewables is harder. And with the macro economy in the state that it is, the ability of governments to subsidize renewables to help them bridge is also in danger as we've seen in Spain and some of the challenge, I think, in Germany. So it's going to take some creative governance to foster renewables as a part of climate change.

You're going to have to have renewable portfolio standards, you're going to have to have flexible targets. So I think in theory the cost of adjustment is considerably lower as a result of these prices, but in practice it's going to take some very creative policymaking.

And of course, in the U.S., just to finish off, we have already gotten a large way towards our target by virtue of backing out gas for coal, and I think as long as gas stays cheaper than coal we'll see that trend continue and perhaps extend to other countries.

LEVI: So if there's a theme to this panel so far, it's that even where we might see some good news, there is bad news that comes along with it. Very uplifting.

We're going to go to questions and answers soon, so get your questions and answers ready.

Before we go, very quickly, a minute each. The president calls you in and asks you to give him one piece of advice, either an opportunity to exploit because the oil price has plunged, or a risk to be prepared for, that people aren't paying sufficient attention to. What do you tell him?


GFOELLER: I would say that in this lower-price environment there's going to be a lot of internal stress on the social-political models in the Gulf, which, despite the growth in U.S. oil production, is still of huge importance to us strategically and to our trade partners and our allies. And I think I would advise him to plus-up the American diplomatic and intelligence network in the Gulf states. These things have been—our HUMINT capacity in general has been allowed to atrophy, in my experience, as we've shifted toward a more technology-driven, you know, model for intelligence and for understanding and working with political systems in these societies which are all about to become less harmonious, I think, in the future be under greater stress. So we should get ready for that before it happens.

LEVI: David?

GOLDWYN: Do I only get one?

LEVI: You only get one.

GOLDWYN: I only get one. I would say there has never been a better time to introduce carbon pricing into the U.S. political dialogue. The costs have never been lower. You could release all the constrictions on crude oil exports as a way of providing some compensation, you know, to the energy industry if it needed.

But the burden and the cost of adjustment is minimal. This is the time to do it. This is something that could be actually supported by the industry. You will never have a better time to do it than right now. Be courageous, take the step.

LEVI: Angela?

STENT: Well, this is now vis-a-vis Russia, which is, I think, a slightly different case. I think it's very important. We can see the economic pain that Russia is experiencing. It's partly the oil prices, it's partly the sanctions. And even though that hasn't led so far to a change really in Russian foreign policy, I think we have to keep the sanctions regime there. If possible, we may have to broaden it if there's more violence and if the Russian-backed separatists try and take more cities in the region.

And I think in general, staying the course and really understanding that we are in a new era in dealing with Russia and that the kind of framework we used to have for believing we could negotiate and come to agreements, we have to question that. And I think that's really reinforced by realizing that, despite the economic turmoil in Russia, there are really no political concessions.

LEVI: Well, at this time I'd like to invite members to join our conversation.

When the microphone comes to you, please stand, state your name and affiliation and ask a concise question so we can get as many in as possible.

Gentleman on the far end of this row here. I'll deputize Angela to ask questions in D.C. as well.

QUESTION: My name is Larry Bridwell and I teach MBA students at PACE University. And Angela mentioned about the new Russia dynamic. There's a counterpart to that. I had a student five years ago who wrote a thesis on an EU energy policy. And in fact, Jacques Delors, one of the last things he did before he died was to head this study. And unfortunately, from what I gather, unless somebody on the panel knows something I don't, there is not a unified EU policy on energy.

And if Russia decides to take advantage of its pipelines through Ukraine and reduce the flow of energy, what does this mean when EU doesn't have a unified energy policy, even though they've tried to get one?

LEVI: Angela, does the collapse in oil prices make it more likely, less likely, irrelevant to the prospect of Europe coming up with a unified energy policy?

STENT: A unified policy—so far, it doesn't seem as if it is. I mean, we saw last year when Russia cut the gas off to Ukraine, some European countries were willing to then re-export gas to Ukraine, some of which they'd actually gotten from Russia, but that began to break down when Russia started to put pressure on some of these countries, particularly southern European countries.

So you know, I referred already to the fact that the Kremlin has been picking off several European countries that are more favorably disposed towards Russia to in fact entice them into new energy deals.

So I would be rather skeptical based on, you know, the historical experience of the Europeans really getting together and having a unified energy policy, particularly when it comes to Russia.

GOLDWYN: Let me jump in on that. First, I would say a completely unified energy policy? No, the Europeans won't have it. But they've made enormous progress over the last five years. There are more interconnections. There is a greater amount of storage. And they have a competition policy sort of, which prohibits dominance of both a supplier and a transportation network.

What really has to happen now, as they're working on a fourth energy package, is whether or not they have the courage to enforce the tools that they have right now.

We saw a little bit of that in South Stream, although I think the issue is not over yet. But they have the ability to, you know, to pass rules under their existing authorities, which could say to Gazprom, which owns capacity in the European pipeline system, that is you're not using it you have to auction that off. That will take a new step on the part of Europeans.

This is the focus of the next G7 summit, this is the focus of U.S. diplomacy right now. So you have the ability in Europe, I think, to bring in alternate supply to move it around the country. And they're also talking about how they'll find that alternate supply, whether it'll be renewables or other things.

But indigenous production has not panned out and doesn't look good. They have to prioritize their list of eighty-five infrastructure projects to two or three serious LNG-importing terminals, probably Croatia and they'll have Lithuania and maybe another one on terms that investors would want to invest in to bring in alternate supply.

But it's always going to be hard to substitute for Russian supply. So what you're looking for is a system which is competitive enough that Russia, which can't really do without those exports, exports at competitive prices.

So I think there is still this huge divide between the commission, which their policy looks a lot like ours, they've got a great plan out on paper, and the policy of Germany and France in particular, which is resistant for commercial and for diplomatic reasons.

So I think that's going to be a push. And I think, you know, what happens over the next, you know, four or five months will be a little bit of how clever U.S. diplomacy can be in trying to get the British and maybe work around Italy and get the others to push the Europeans where they need to go and where they now have the authority to exercise a more competitive policy than they've had in the past.

LEVI: Angela, do we have a question in D.C.?

STENT: Do we have a question? Yes, we do in the back there.

QUESTION: Jessica Deahl from NPR. In an earlier session, Libyan oil coming back online was sort of listed as one of the factors bringing local prices back down.

I'm sorry, can you hear me better now? Sorry. Should I start from the beginning?

LEVI: Please, please.

QUESTION: OK. So my name is Jessica Deahl, I'm from NPR. In an earlier session, one of the factors given for global prices coming down was Libyan oil coming back online. Obviously, the situation in Libya is very unstable. So I'd like to hear if there are any thoughts on how tenuous that supply is and how disruptive would it be if that were to come back offline.

LEVI: So David or Michael, if either of you can answer that. But also, is there a feedback loop here? When you have lower prices, does that affect stability in Libya?

GFOELLER: Well, on the tenuousness of the recovery in Libyan production, it's very tenuous. If you look at the last couple of years in Libya, large fields have gone on and offline regularly. Libyan production has swung wildly from as low as 85,000 barrels a day last year to, you know, as high as a million barrels a day, again, last year. So you know, these huge production swings have a big impact in the short term on prices.

But the key thing to remember about Libya geopolitically is that it's now a divided state. You have one government in Tripoli, which is essentially run by the Muslim Brotherhood and backed by militias from Misurata and from Tripoli itself, and then you have another government in Tobruk, which is internationally recognized and is backed by tribal militias, remnants of the Libyan army under Qaddafi and the armed forces cobbled together by an American citizen actually, General Khalifa Haftar, a resident of, you know, Falls Church, Virginia until not too long ago who went back during the revolution against Qaddafi and is now leading what is left of the armed forces of the internationally recognized Libyan republic.

So for a long time, the civil strife in Libya did not impact the oil and gas infrastructure. Both sides, actually all sides because it's a multi-sided civil war, stayed away from it. That's no longer true as you now have tribal and religious militias trying to seize control of things like export terminals, pipelines and individual oil fields. And that's impacting the integrity of the infrastructure.

So I would really, you know, look with more than a little caution at any recoveries in Libyan production because this stuff can change overnight.

GOLDWYN: I agree with Michael, especially on the tenuousness of the situation. But there is a feedback loop, Michael. And I think the, you know, in the western part of the country early on, a lot of the hold up in production was a matter of extortion, which was local protection militias really wanting money. But in the eastern part of the country, it was much more about sovereignty, they wanted actual control.

But there was a little unwritten bargain which is what led to the restoration of production in September, which is, if you open the terminals and more cash comes in, you can sort of divvy this up.

Once the Islamists got control of the central bank, the ability to sustain that bargain pretty much evaporated, and therefore, you no longer have the ability to share that wealth, so now it's a fight for the wealth. And as the terminals are shut in and the production is shut in, of course the companies, which were producing even minimally, they've long had their ex-pats out, but then, you know, there's very minimal interest in paying any militias to do any protection because there is no money to be made there.

So the pie is shrinking and it leads to the further instability of the country. It's just hard to see the way back.

GFOELLER: I couldn't agree more. That's true.

LEVI: Please, here.

QUESTION: Hi. I'm Nili Gilbert from Matarin Capital Management. I was wondering if we could talk a little bit about the geopolitical implications of energy security here in the United States. All hailed the arrival of greater energy security in the U.S. when production was increasing on higher prices. What do you see as some of the potential geopolitical costs of the step away from production here in the States, and exports? And what may be some of the likely political responses to that?

LEVI: And let me put a sharp point on that. Let's say you have one world where the United States imports very little, but the price is high. And you have another world that you can choose where the United States imports quite a lot, but the price is a lot lower. Which one is better for American security and puts the U.S. in a better position to deal with geopolitical challenges?

I'll let each of you have a crack at this question from the floor and this choice.

Angela, do you want to...?

STENT: No, I think I'll let my colleagues in New York take this one.

LEVI: OK. Terrific. Well, I know which one Russia would choose.


GOLDWYN: Well, I think a world where we export more—we import more and prices are lower is better for the economy. But more to the energy security point, I think a world where we are connected to the world economy by being able to export and import freely, where we are—when we have excess of a grade of crude, we can supply it and bring the global price down and we can help allies who are in need, where we can substitute our production for somebody else who goes offline, is a more secure world. Autarchy, autonomy, is never the way to energy security. It is more resilience in the system and more interdependence.

So I think we are not walking away from production. It's still up, just less than it might have been absent the low prices.

But I think the world has changed for the U.S. I think we now have this ability to deploy capital quickly, to revive production quickly, because the nature of shale production is just not as long a cycle as deepwater or other kinds of production.

So we have this, you know, this reserve ability to respond within a reasonable period of time to global market signals. So I would like to see us in a world where we are connected to the market and where we use this as a source of foreign policy power, where we can use our strategic reserves to export oil to others or we can tell the Japanese or the Koreans they can rely long term on U.S. supply if they want to buy it from us, and where we are when we are looking for other countries to reject Iranian supply, and we're talking to the Indians and the Chinese, we can say, you know, we're not just telling you don't, we're telling you we're going to contribute to the solution by exporting.

So I'd much rather see us in that world; in twenty years from now oil may not be as important and we not be exporting as much, we might be importing more, but we will have built an international system, you know, free in trade which is the core of everything we have done in trade since the end of World War II.

LEVI: More production gives us more leverage, in your view, and at some level may be worth a slightly higher price to sustain. Is that...

GOLDWYN: Yes, although it'll—I think the studies that we did at Brookings and that Jason did at Columbia and everything else has pretty much said that domestic producer prices will rise if you allow U.S. prices to reach global prices, but domestic gasoline prices will be modestly lower and directionally lower because you'll increase the total crude supply by some measure and gasoline is priced to Brent.

So I don't think—I want to be precise about higher prices. You're only talking about domestic producer prices because you're not artificially protecting them.

LEVI: And you are talking in particular about the implications of changing the restrictions on oil exports, not the broader moves in prices, just to be clear when you're talking about these studies.


LEVI: Michael, are we—prices go down, people are saving money, but the United States has larger net imports, what are the consequences, as you see it, for relations with the Middle East? Do the Saudis feel more comfortable in their dealings with the U.S.?

GFOELLER: Not particularly. I mean, I agree with the point about autarchy. We cannot think about this in an autarchic fashion. I mean, whether prices are high or prices are low, we have fundamental strategic interests in the Gulf, because at the end of the day it is one of the principal forces of the global oil industry and it's a fungible commodity and a global industry that our trading partners and allies depend on.

So I think, frankly, what we need to do at this stage—and we are making recommendations on policy, which is a line I was in for a long time, but no longer am in, but set me back in those shoes again—we need to remember the fundamental importance of those core alliances we have with the GCC producers.

You know, we have the 5th Fleet for a reason, we have NAVCENT for a reason, maintaining those sea lanes is of critical importance.

The problem with NAVCENT, you know, is it's done its job so well for forty years that people kind of forget it's there unless there's a crisis with the Iranians over the Straits of Hormuz. But it's fundamentally important and I think we need to revive some of those alliances that have fallen a little bit on hard times.

LEVI: Please? We'll go to the next question, it will come from Washington.

STENT: Yeah, OK, thanks. Yes.

LEVI: The next question after this one will come from Washington.

STENT: Oh, yes.

QUESTION: Frank Wilde. I have a very simple question. I've been waiting for almost an hour to hear the words Turkey, Syria, Israel. What are the implications of all this on those rather important places?

LEVI: Who would like to use one or more of the words Turkey, Syria and Israel.

GFOELLER: Well, we can talk about Syria. You know, the implications of the collapse in oil prices on these three countries? That's what you're interested in, right? OK.

So in Syria, you know, the Saudis and the Emiratis and also the Qataris, to a considerable degree, have been funding various sides in the complex Syrian civil war for some time now, as have the Turks. Turkey not being a major oil producer, it doesn't really apply to them in the same way.

But obviously, the ability of the Gulf states to influence events in Syria just declined. So did Iran's ability to do so because their oil income has fallen tremendously. So what you have is a continuing, multisided civil war, but the financial means at the disposal of all of the parties have fallen.

So which of the parties to the conflict can deal with this circumstance the best? It's the Islamic state actually and the Islamist militias that are allied with it, because their operations are inherently more cost-effective and cheaper than, you know, foreign aid programs for one militant group or another being run from a distance.

The other party that's negatively affected, of course, is the Assad regime because they've been so reliant on subsidies from both Iraq and Iran, largely Iran, of course, but some from Iraq in the form of oil shipments and cash transfers.

So one can see this already in the performance of Assad's military machine on the ground. The Islamic state, which is doing better in relative terms, is now in the suburbs of Damascus, they were not there before, they're making progress near Aleppo. Assad is falling back on both fronts. He's having trouble paying for diesel for his armored vehicles, his jeeps and such. He's having trouble manufacturing or buying kerosene for the fleet line—or fleets.

So at the end of the day, he's holding ground, but falling back. And so in net terms, it's still a long, bloody civil war. There's not going to be a dramatic shift on the ground at this point. But one can see the Islamic state doing better against the regime and one can see the Gulf states having more difficulty funding their portions, their sides of the conflict.

A party that's actually doing better despite having taken a huge hit, a huge gut punch in terms of falling oil prices, is the Kurds because of the efficiency of the Peshmerga. They simply are the most effective fighting force right now in this rather disorganized struggle against the Islamic state. And so they've managed to exploit the huge potential impact of the coalition airstrikes more effectively than anybody else, certainly much more effectively than the Iraqi government.

You didn't ask about them, but it's part of the same battle space because the Islamic state looks at Syria and Iraq as a single battle space. And the Iraqi government's having the same problem as the Assad regime. They simply don't have the wherewithal to keep funding this vast military apparatus, now largely militia-dominated since the collapse of the Iraqi army last summer.

All these things cost money and there's less money to go around.

So to sum it all up, all parties in the conflict are operating with reduced budgets. The Islamic state is operating more efficiently than Assad at this point and is gaining ground against them in Syria. And the Peshmerga are operating with very high level efficiency despite the budgetary stringency they're operating under.

GOLDWYN: Jump in on Israel and Turkey.

LEVI: In one second. I want to go to Angela first still on this Syria question, because there's been plenty of speculation in the press that one of the reasons that Saudi Arabia might not mind the collapse in oil prices is because it hurts Russia and Russia is seen as supporting the Assad government.

So let's set aside the question of what is Saudi Arabia doing and why. If that is what they want to see, are they going to be pleased or are they going to be disappointed in shifts in Russian policy toward Syria?

STENT: Is who going to be?

LEVI: Will the Saudis, when they look out and say—has this shifted the Russian approach to Syria? This is sort of the bank-shot theory that you see in a lot of the press.

STENT: Sure. Right, exactly. And rumors that there's going to be a deal if the Russians abandon the Assad regime and somehow prices will go up. I read that story in the New York Times.

You know, the cornerstone of Russian policy in that part of the world is to have strong secular leaders. You can only understand Russian policy by understanding Russia's own problems with its own Islamic minority in the North Caucasus particularly. And there's a direct connection between the two. And so Russia wants these strong secular leaders.

The Russians always assumed that Assad will prevail. Now having listened to Michael, maybe the presumption is wrong. But they've banked on that. And I see no reason why they're going to shift their position on this.

They have tried to mediate. They did have a conference a few weeks ago in Moscow where they tried to bring the opposition parties together, but obviously, many of those parties didn't go to Moscow.

I do not—I would be very surprised if there's a shift in Russian policy towards Syria because, again, it's the cornerstone of Russian policy in that part of the world. You've just seen Putin go to Egypt to revive the dormant Russian-Egyptian relationship which was sort of downhill since the Soviets and the Egyptians broke with each other or the Egyptians broke with the Soviets in 1973. And suddenly, Mr. Sisi is talking about possibly joining the Eurasian Union. There was all the fanfare, a parade for President Putin. So Russia is actually reviving its contacts and its influence, I would say, in that part of the world.

But again, based on supporting these strong secular leaders that oppose Islamism, that oppose all of these radical movements that are also a threat to Russia, and so I don't see that changing despite, you know, changes in oil prices or that forcing the Russians to change their policy because they'd like the Saudis to somehow raise oil prices, if indeed they could do that.

LEVI: David, can you fill us in quickly on Israel and then we'll go to a question in D.C.

GOLDWYN: I think this low-oil-price cycle is bad news for Israeli gas, also combined with, I think, an overly aggressive competition policy. LNG projects are hard to finance now, they're going to make less because prices are lower. And I think it was a risky prospect to begin with. So absent a change in policy, I think that's bad news for Israeli gas.

And how Israel is impacted by the cycle really depends on what you think of the Iran deal. Because if you think that deal is good and Iran is more motivated to make it and they will be more secure, then it's a positive. And if you're not so confident in that deal, then it's not.

And I think if the cycle continues, and I don't think that it will for more than another year, then I think you could see some serious instability in that entire perimeter. And that can't be great for Israeli security either.

LEVI: Angela, do we have a question in D.C.?

STENT: Yes, we do have a question. We have several.

LEVI: Excellent.

QUESTION: Hi. David Merkel. I wanted to ask about Russia's relationship with Turkey and China. I was in Turkey when Putin was there trying to breathe life into South Stream by making it Turkish Stream. Will Turkey's frustration with the EU and its desire to be an energy hub breathe more life into that relationship?

And Russia-China, is there a possibly going to be more competition over the Chinese market between Russia—this is more in gas—between Russia and Central Asia, Turkmenistan, Kazakhstan, and will that create more tension? Will Russia's tilt towards China create more tension in that competition over Central Asian gas? Thank you.

STENT: OK, those are great questions. Well, yeah, I'm glad you mentioned China because I guess we haven't mentioned it yet. China has, in general, been a beneficiary of all the problems that the Russians are having with the falling energy prices because, as you know, for ten years the Chinese and the Russians were trying to negotiate a gas deal and they never signed that deal because the Chinese didn't like the price, they wanted a lower price.

Well, last year when Russia was really suffering from the sanctions, the oil prices beginning to fall and Western ostracism, the Chinese got apparently a very good deal in this $400 billion gas deal they signed with Russia. We don't know the terms of it, but we know that, you know, we've heard Russians privately say that they were, quote-unquote, "taken to the cleaners".

So whether these gas pipelines will be built and what's going to happen to these deals nobody knows because it takes them, obviously, a number of years. But the Chinese have certainly been beneficiaries there.

Then, I mean, in Central Asia, China and Russia have been economic competitors for some time. And a number of key Central Asian countries obviously are very pleased to increase their, you know, gas and oil exports to China because they also want that balance between Russia and China in terms of trying to influence their own countries.

So I would say this. You know, and the other thing, however, is that the Russians have been turning to Chinese to try and help bail them out, again, because of the fall of the ruble and all of their economic problems. And the Chinese have given them some financial relief since, again, Russia doesn't have access to these international capital markets, but they haven't given Russia nearly as much as Russia would like. And I think the Chinese obviously are very hard bargainers and they'll help Russia out to some extent, but not nearly as much as Russia probably needs.

And as far as Turkey is concerned, I mean, this is a very complicated relationship. Yes, you have Putin in Turkey, you've got the new so-called Turk Stream. And in that sense, yes, Turkey's feelings of rejection by the European Union and its increasing authoritarianism domestically, people say that President Putin and Mr. Erdogan are kind of natural allies in many ways, is one thing that clearly has been drawing Turkey toward Russia.

But on the other hand, again, if you come back to Syria and all of these issues, they have a very different view of what they would like the outcome of some of these major conflicts in the Middle East to be.

So I see this as—the Turkish-Russian relationship is one that is improving and they're drawing closer, but it also has its own contradictions.

LEVI: Do we have any questions in New York? Please. And I just want to remind members that this meeting, including your questions, is on the record.

The gentleman back there.

QUESTION: Stephen Blank, University of Ottawa, Energy Conciliatory. When we talk about U.S. energy security, we sometimes get mixed up between the United States and North America. So this question leads to that.

Michael, you and Joe Dukert, others have talked about how deeply integrated the North American energy systems are, quite more than most people see. Have recent events, the gale shale, the pipelines built and unbuilt, the changing price of oil, altered that? Are we becoming less integrated, more integrated? What do you think is going to happen in the next few years?

LEVI: I'm not going to answer your question. But it is striking when we think about the geopolitics of energy, we typically are not thinking about U.S.-Canada relations.

But David, I'm going to ask you, does the fall in oil prices change the politics of the Keystone Pipeline? And on the Mexico front, as Mexico struggles to adjust with the impact of low oil prices, particularly beyond the next year when its hedges wear off, does that spillovers for the United States?

GOLDWYN: Well, I think low oil prices should not change the economics of the Keystone Pipeline very much. Pipelines are built for a long relationship. We consume an enormous amount of heavy oil. Our choices are still Saudi, Venezuela, Mexico, although they're declining it for now, and Canada. So I don't see that changing. So I think Canada remains fundamental to our energy security, not to mention the relationship on gas and on electricity and on nuclear, which kind of goes both ways.

So I think we're looking at more North American integration, not less.

And I think the case on Keystone, on the economics and on the national interest determination, remains overwhelmingly in favor of permitting that pipeline. And then there's the Enbridge Pipeline behind that. And you can make the case either on safety grounds that rail and truck don't look like such good ways to ship oil these days, or you can make it on long-term security grounds, which is, would you rather have pipe or seaborne, or you can make it on economic grounds, which is that we have these heavy-oil refineries will refine heavy oil wherever it comes from, and the three environmental studies that the State Department has commissioned and one volunteered by the Department of Energy, which all say that the oil will get produced regardless, so even low prices, the pace may change, but I don't think that the economics are in question.

So I think that's the long-term story.

Mexico is interesting. They are doing really remarkable things. I think we're looking at closer gas integration because Mexico will not succeed in the unconventional gas production in the next few years and they're already shrinking that bid around. They're planning on a lot of U.S. gas.

And so we're going to see closer integration there. That's going to mean lower electricity prices in Mexico, more manufacturing in Mexico, greater contribution to the trade relationship. That is a net-plus for the U.S. on economics and it's a net-plus for the United States on security. So anything we can do to help advance that I think we should do.

And even on oil, I think, you know, companies look long term. I think they're, you know, they're going to bid on the deepwater, they're going to bid on some of the others. Mexico won't make as much money over the short term, but you know, these are long cycles. And I think President Pena Nieto should get a Nobel Peace Prize for taking heroic steps which will not pay any dividends during his presidency, but nonetheless he's done the right thing for his country.

So I think we're looking, in all those cases, at closer economic integration and closer energy integration. I would love to see a world where our surplus of gas makes it through Mexico all the way to Central America, makes it to the Caribbean. I think that's the next step in integration because it would be a huge plus for climate as well as for security. But that's probably a bridge five or eight years out.

LEVI: Angela, do we have one last, very short question in Washington?

STENT: Yes. Is it a short question?

LEVI: A short question with a short answer.

QUESTION: Thank you. Bill Murray with Energy Intelligence Group. You talk a lot about the insecurity and instability and some of the things you're talking about in terms of Turkey and Russia, that these low prices over a period of time, especially for Russia. I'm wondering if we are underplaying the destabilizing factor.

And also in terms of Turkey, perhaps moving it forward, it seems that Turkey is making some of the same mistakes that Syria made during the Iraq war, of allowing a lot of free traffic of fighters, foreign fighters. And I was just wondering if there's any black swans out there that we're not really thinking about in terms of what are the real effects of this massive change we see, some of which are oil-related and some of which are more tangential.

LEVI: Well, why don't we talk very quickly about Russia’s stability. And I'm afraid we're not going to have time for the rest of the black swans.

STENT: Well, again, it's a huge question. I mean, at the moment, the Russian government appears to be quite stable and all of the propaganda that the people are hearing, the patriotic fervor is working. If you look at public opinion data, the population doesn't blame the president for their economic problems, but they blame, you know, unnamed forces, either corrupt officials in lower ranks of the government or, again, America's Fifth Columnists in Russia.

However, in the longer run, as we know, the demographic situation in Russia is very problematic. Russia does have to undertake serious economic reforms, pension reforms, all kinds of reforms. And at the moment, the way that they're dealing with the problems is just handing out more money to people. But they've already announced 10 percent budget cuts except for the military.

So in the longer run, you know, an outsider looking in would say the trends are not good, the infrastructure is crumbling, you know, the best and brightest are emigrating and something will happen. But we tend to be too quick often to think that things are spiraling downwards in Russia and that the whole system will collapse. And it's maybe more resilient than we understand.

So of course, there are potential black swans, but I wouldn't write Russia off or think that there's going to be some major collapse anytime soon.

LEVI: Well, we are about out of time. This has been a fascinating discussion. I want to thank our speakers. I want to thank our events and meeting staff for putting all this on. Please join me in thanking them.


I look forward to seeing all of you at our symposium next year on the oil price spike.


And you are all welcome after this uplifting session to join us for a cocktail reception in the Pratt House to drown your sorrows.

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