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  Contents

  Preface

  Introduction

  SECTION ONE

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  The New Energy Abundance

  One: Behind the Price Plunge

  Two: The New Oil Order

  Three: Natural Gas Becomes More Like Oil

  SECTION TWO

  * * *

  * * *

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  The American Phenomenon

  Four: America’s Unrequited Love

  Five: Hard Power Accelerator

  Six: Soft Powering Up

  Seven: Energy Abundance, Climate, and the Environment

  SECTION THREE

  * * *

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  The International Environment

  Eight: Europe

  Catching a Break

  Nine: Russia

  More Petulant, Less Powerful

  Ten: China

  Greater Degrees of Freedom

  Eleven: The Middle East

  Trying to Make the Most of a Tough Situation

  Conclusion

  From Serendipity to Strategy

  Acknowledgments

  About the Author

  Notes

  Index

  To my parents, Michael and Kathi O’Sullivan

  Preface

  On January 17, 2017, the leader of one of the world’s largest economies took the stage at a gathering of global elites in Davos, Switzerland. He made a forceful and compelling case in favor of globalization and free trade, evoking Abraham Lincoln’s Gettysburg Address in the process. “Say no to protectionism,” the speaker implored. “It is like locking yourself in a dark room. Wind and rain are kept out, but so are light and air.” What was unusual was not the message—particularly at this meeting of 1,250 global leaders and CEOs—but the messenger.

  The speaker was Xi Jinping, the first Chinese president to ever address this annual assembly of the World Economic Forum. Although China’s embrace of free trade was far from complete, Xi was clearly maneuvering to position China as the new vanguard of globalization. To further confuse those surprised by China becoming the global advocate for free trade, only three days later, a newly sworn-in President Donald Trump stood in light rain on the steps of the Capitol in Washington, D.C., and delivered a fiery inaugural address extolling the virtues of guarding borders and promising the American people that “protection will lead to great prosperity and strength.”

  This pairing of speeches, in which the American and Chinese presidents seemed to have swapped texts, roles, and global orientations, is only one of the indications that the world in 2017 is in tumult and in the throes of historical change. A growing tide of populism, the rise of once-marginal powers, and real questions about continued American global leadership are shaping the geopolitical landscape. To make sense of the changes, we would normally look to historical, cultural, economic, or political trends. Such matters will continue to provide insights into foreign affairs. But new variables—such as technological and social change—need more of our attention, as do old drivers that have been consistently underappreciated. In a quest to better understand the world unfolding around us, understanding energy is critical.

  Often overlooked as a determinant of global politics, energy has long been a driver of international affairs. The shift from wood to coal allowed for the making of steel, helping usher in the Industrial Revolution in Britain and elsewhere in the late-eighteenth and early-nineteenth centuries. By the mid-1900s, however, oil had overtaken coal, bringing with it a surge of game-changing innovations, including the internal combustion engine and the tank, which ended the stalemate of trench warfare in favor of Britain in World War I.

  As discussed so vividly in Daniel Yergin’s Pulitzer Prize–winning book, The Prize, for much of the twentieth century, the economics of oil and gas in particular have permeated geopolitics and vice versa. The history of grand strategy during that era was often the history of efforts to gain or deny access to energy. For instance, many pivotal moments in World War II—from Hitler’s drive to the Caucasus to Japan’s quest for Borneo to the failed drive of Germany’s Afrika Korps across North Africa—were shaped decisively by oil. Decades later, perceptions that the Soviet invasion of Afghanistan could be the first step in a push to control energy resources in the Gulf informed U.S. and Saudi efforts to support the Afghan mujahideen.

  More recently, oil and gas have funded the rise of separatist groups in Nigeria and played a critical role in the surprising rapprochement between Turkey and the Kurds of Iraqi Kurdistan.The need for reliable energy supplies has also underpinned unlikely partnerships, such as those between Washington and Riyadh or between Europe and Russia. And for the bulk of the last thirty years, nervousness over energy scarcity was one of the most important animators of Chinese foreign policy.

  Today, the impact of energy on international affairs is as pronounced as ever. Yet energy’s bearing on geopolitics has arguably never been less understood. Why is this the case? One possibility is the rate of change. In the last decade alone, developments in the world of energy have unfolded at breakneck speed. Technology has brought large quantities of oil and gas once thought too expensive to produce to global markets. The declining costs of some renewable energies are making them competitive in some locations without government support. Digitization is introducing the possibility of once-unimagined efficiencies. And concerns over environment and climate change are spurring new forms of global action. All of these changes, moreover, are part of dynamic systems, which will continue to evolve, injecting new incentives and obstacles into the political domain as they do.

  Another reason why energy has not figured more prominently in the analysis and making of foreign policy may be explained in the work of Robert Jervis, a professor now at Columbia University who has applied psychology to policy and decision-making. Jervis writes of the tendency of all people, when seeking to explain complex phenomena, to unconsciously discount the importance of factors they do not understand. The workings of energy markets are often complicated and technical, possibly leading many to gloss over their critical role in shaping international affairs and to focus instead on more intuitive explanations such as politics and history.

  This book intends to remove that obstacle for nonexpert readers seeking to appreciate one of the most longstanding and consequential drivers of global politics: energy. It demystifies energy markets and powerfully and tangibly relates them to the most basic and fundamental drivers of foreign affairs. It demonstrates how the energy revolution that has taken the world by surprise in the last decade is creating both new opportunities and new challenges at a global level, altering the balance of power between countries, and shaping their actions and attitudes toward one another.

  Understanding this interaction between energy and international politics is and will continue to be essential to appreciate the unfolding global landscape. It will arguably be more important in driving foreign policy outcomes than many of the other issues consuming the calories of policymakers and the airtime of pundits.

  The twelve months of 2016 were sobering for those who believed they understood the underlying dynamics of many global trends. The frequency with which conventional wisdoms a
nd established understandings were proven wrong should spur us to look for new lenses through which to comprehend the world. This book offers its readers just that. Many readers will be surprised at how powerful the prism of energy is in making sense of global events. While surely not determinative on its own, energy is and will continue to be a major driver of how the world works.

  Introduction

  Isat waiting a bit self-consciously on the sofa in a large, tidy office—something of a cross between a workspace and a diwan, which in the Arab world is the section of a house that is always open to guests. I wore the customary long, loose black abaya, but I had let my headscarf fall and rest draped around my shoulders. In previous meetings in Saudi Arabia, I had opted for what I called the “Benazir Bhutto look,” where I covered my head but let more than a few wisps of red hair escape. Yet the assistant in the outer office had insisted that the senior ministry official I was waiting to see “was a modern man” and there was no need to cover my head in a private meeting. Still, I was uncertain whether I was transgressing what was considered appropriate in this highly conservative—and, to me, still mysterious—society.

  I had slipped out of a large conference of analysts and diplomats I was attending in Riyadh at the invitation of the Saudi Ministry of Foreign Affairs to hold this private meeting at the Ministry of Petroleum and Mineral Resources. It was September of 2014 and the Middle East was smoldering. Earlier hopes that the removal of rulers from Tunisia to Egypt would lead to more participatory governments now seemed shockingly naive. The civil war to upend another autocratic ruler, President Bashar al-Assad in Syria, was raging. The United Nations had estimated a month earlier that 191,000 people had been killed there—with little hope for an end to the violence.

  Two months previously, the Islamic State for Iraq and al-Sham (ISIS) had commandeered international attention with its brutal tactics and the shocking ease with which it had wrenched control of nearly a third of Iraqi territory away from the government in Baghdad. The United States had just begun limited air strikes. Perhaps in response, ISIS had beheaded yet another American, journalist Steven Sotloff, only days before I arrived in Riyadh. Tensions within Yemen were also simmering. Several days later, they would boil over when Iranian-supported Houthi insurgents stormed the Yemeni capital of Sana’a and forced the resignation of the country’s prime minister.

  In the eyes of the Saudis, one factor tied nearly all these developments together: the nefarious efforts of Iran to destabilize the Arab world and assert dominance in the region. Most Arabs I met that September believed the United States was foolishly abetting the Iranians through its pursuit of a nuclear accord and remaining aloof from the region as one fire after another lit up the Middle Eastern sky.

  I had sought private meetings at the ministry, not to speak about the regional political and security meltdown under way at the time, but to talk of the economic crisis I saw on the horizon. I had been hearing from oil producers from North Dakota to Texas to Pennsylvania about the remarkable transformation of the U.S. oil industry as American entrepreneurs tapped new resources. Since 2010, U.S. crude oil production had surged, consistently surpassing even the most bullish expectations—sometimes exceeding the previous year’s forecast by more than a million barrels. It was clear to me that, almost one for one, this surge in American crude was substituting for barrels coming off the global market as Middle East producers wobbled. The result was that the price of oil remained remarkably stable despite the dramatic events unfolding. It was an amazing pairing of developments, and one I suspected would not last long.

  Barring some grave unanticipated event, global oil production would soon outstrip global demand. Thanks to what many were calling an “energy revolution,” American oil production was nearing all-time highs, while Russia was producing record amounts and Saudi Arabia very close to it. What’s more, oil demand growth seemed to be stalling, reflecting slowing economies and rising efficiency; global oil demand for the first half of 2014 flatlined from the end of 2013.

  In my writings and speeches I had suggested that, as a result, the price of oil was in for a significant decline. And I wanted to get a sense from Saudis themselves whether the kingdom was poised to take action to stem a weakening price, as they had done so often in the past.

  My view of the future was not widely held at the time. Even as the price of oil dipped just below $100 a barrel for the first time in more than two years, producers remained sanguine. Just before I had boarded the plane to Saudi Arabia, in fact, I had defended my views at a workshop in New York. Several participants, pointing to the high costs in the oil industry, adamantly disputed my assertion that the world was moving into an age of “energy abundance.” My Harvard colleague Leonardo Maugeri, who had been even earlier and bolder in his predictions of an oil glut, elicited snickering from an audience when he predicted in 2012 that oil could fall to as low as $50.

  At the time, the Paris-based International Energy Agency (IEA) was advancing the more conventional view that new American oil production, rather than undercutting global prices, would continue to contribute to global oil price stability. Indeed, it predicted that over the next couple of years, prices would remain slightly above $100. Abdalla Salem El-Badri, the secretary general of the Organization of the Petroleum Exporting Countries (OPEC) at the time, took the same position during a May 15, 2014, speech in Moscow. El-Badri interpreted the steady oil price over the previous several years as evidence of consumer and producer satisfaction with the price level, which clocked in at $110 a barrel on the day of his speech. El-Badri focused on steady demand growth and sufficient supply, calling the market balanced and predicting it would stay that way for the rest of the year.

  By the time I had reached Riyadh, oil prices had just begun to soften, but people in positions of authority expressed confidence that prices would remain stable. Prince Abdul Aziz bin Salman, the then–assistant minister of petroleum and an influential and highly competent royal family member, had made a forceful case to the conference I came to Saudi Arabia to attend. He argued oil markets would remain balanced and the high costs of producing some resources “help put a floor [under] the long-term oil price.” Dismissing gyrations in the price of oil as temporary, the prince focused on expectations of a young, burgeoning global middle class driving up oil consumption and “a shrinking pool of cheap and easy oil.”

  A Meeting at the Ministry

  My meeting began with a handshake and quickly turned into a wide-ranging and fast-paced conversation covering energy trends, U.S. military power, and American allegations that Saudi Arabia was the root of Islamic terrorism. With a look that was either playful or mischievous, or both, the official told me that Saudi Arabia welcomed America’s growing oil production. “We should be happy for our friends for this good fortune,” he suggested.

  The two countries, he added, were destined to become even stronger partners as their interests in oil became more closely aligned. Like his colleague at the conference, this official also seemed unfazed by the possibility of a significant drop in the price of oil. When I pressed the issue, he pointed to how the world had absorbed millions of barrels of additional oil from the Caspian and Angola in the previous decade, all without a major dip in the price of the commodity. He took a long-term view. While some in the United States saw the new energy abundance as a path to energy independence, freeing the nation from reliance on Saudi oil, he saw, instead, the basis for cooperation. Moreover, he posited that the United States would no longer be interested in lower prices, as they would undermine America’s newfound “strategic advantage.”

  But what made the meeting so memorable was the official’s response to one of my questions in particular.

  “Will Saudi Arabia continue to produce today’s large volumes of oil even in the face of a falling price?” I asked.

  Without a moment’s pause, he replied, “You can bet on it.”

  He then referred back to earlier times when Saudi Arabia cut its production in a failed eff
ort to boost oil price. Revenues plunged as the price remained low, lurching the kingdom into economic crisis and political uncertainty. “We remember 1985 and 1998 and how we can’t hold people’s hands while our feet are to the fire. The price will be what it is.”

  Wanting to make sure there was no misunderstanding, I then diplomatically inquired if this approach effectively made OPEC “less relevant.”

  “Are you asking me if OPEC is dead?” The official quipped, “I never like to say OPEC is dead, but . . .”

  Our chat ended shortly thereafter, and I left the ministry. Repositioning my headscarf before stepping out into the Saudi heat, I felt a sort of excitement, the sort of rush one feels when one has gotten the final piece of a complex intellectual puzzle. But I also felt a foreboding. If what the official told me proved to be true, the global oil market—and the world—was in for a dramatic shock if a falling price would elicit no action from Saudi Arabia or OPEC to stabilize it. There would be huge winners and losers, and the process of reshuffling would be both jarring and destabilizing for governments and people around the world.

  The Price Plunge

  The coming months demonstrated that my interlocutor had indeed told me exactly what would happen—or, rather, not happen. The oil price began to drop sharply, but Saudi Arabia and OPEC sat on the sidelines. The extent and duration of the resulting price plunge far exceeded my expectations or, almost certainly, those of individuals with whom I had met in Riyadh. The price of oil didn’t just dip—it took a nosedive, declining more than a fifth in the two months after I left Riyadh.