Hot Commodities

Hot Commodities: When the Lights Go Out in the City

By Ellen Scholl
Wednesday, November 4, 2015, 5:59 PM

When the Lights Go Out in the City

Commentators have made much of ISIS’s progress on the battlefield, but Foreign Affairs has developed a new metric to assess the terrorist group’s endeavors to establish a caliphate: electricity supply. In a country known for its notoriously unreliable and limited electricity and the proliferation of private generators, data from the Iraqi electricity ministry shows that areas under ISIS control have experienced a drop in electricity consumption. This seems to contrast with the operating environment in Syria, where the Financial Times brought us the story of cooperation between the regime and the terrorist organization when it comes to keeping the lights on.

However, while perhaps proof of the fact that ISIS, despite its claims, is not in fact a state nor is capable of running one, the authors argue that such deficiencies are unlikely to impact the group’s ability to recruit followers or achieve battlefield success--that is, unless the Iraqi government, which also has a spotty service-provision track record, is able to capture, capitalize on, and channel public dissatisfaction.

It is quite possible that the Iraqi government, and not ISIS, will bear the brunt of public discontent over the lack of electricity thanks to mismanagement and corruption plaguing the sector. The Guardian recently reported that corruption and mismanagement in the electricity sector is “more dangerous than ISIS.” While the Iraqi government has passed some reform measures intended to eliminate graft, mismanagement and outdated infrastructure are rampant--and also to blame for poor electric service provision.

 

Feeling the Heat

If discontent is already simmering, temperatures could soon make things a lot more uncomfortable. The New York Times reports on a new article in the journal Nature which contends that by 2100, the combination of humid summer conditions and high temperatures in the Persian Gulf could result in life-threatening conditions for anyone without air conditioning. The prognosis: temperatures that will be “intolerable to humans” by 2100. This grim forecast seems to substantiate Thomas Friedman’s gloomy warning following the record 165 degree heat index in Bandar Mahshahr, Iran in July that if different conflicting actors in the Middle East do not settle their differences and resolve their conflicts, “Mother Nature is going to destroy them all long before they destroy one another.”

While the ability of Middle Eastern governments to cope with such high temperatures is an open question, past experience does not inspire confidence. Record high temperatures in Iraq during the summer resulted in mandatory holidays as the government urged residents to stay indoors with air conditioning and water. However, heeding such warnings is only an option for those that have a home with air conditioning to stay in or access to water to drink. For the more than 3 million people displaced by conflict in Iraq and the more than 10 million displaced persons across the region, staying inside with the AC on high may not be an option.

As temperature across the region rise, protests like the ones that erupted in Basrah and Baghdad this summer may become more commonplace—and potentially more violent—particularly if extreme temperatures are mirrored by extreme inequality in energy access.

As wealthier residents enjoy the benefits of air conditioning, swimming pools, and summers in the Swiss Alps, those left to swelter in (all but literally) boiling temperatures may become increasingly frustrated. And if populations feel electricity provision is being mismanaged or used as a political tool, temperatures and tempers may boil over, and governments may increasingly find themselves in the hot seat.

For anyone still on the fence on the subject of climate change, this is just another reason to consider why the May 2015 White House report on The National Security Implications of a Changing Climate and the Department of Defense 2014 Climate Change Adaptation Roadmap called climate change an immediate risk to national security.

 

From Bad to Worse

While the mercury might be rising, prices in the oil market are not. During a recent broadcast, Venezuelan President Nicolas Maduro announced the country’s crude price hit a six-year low—the result, according to Maduro, of outside forces attempting to drive prices down in advance of the election. Outside forces aside, this is not welcome news in a country where oil accounts for half of the government’s budget. Neither is being told by the IMF that the country will, in an election year, experience the worst economic recession of any country worldwide. It’s particularly bad for a country running out of currency reserves and selling off its gold.

Time for some belt tightening? Hardly.  

Amid these dire economic circumstances, the government announced plans to raise salaries for a number of public sector employees, including those at PDVSA, the Venezuelan state-owned oil company. Not only is the government doling out cash in the run up to elections, it is also heavily subsidizing domestic fuel consumption--to the tune of $12.5 billion annually. Reform while oil prices are low? Think again. Maduro has called this a non-starter, as he “does not want to throw more gasoline on the fire.” Or raise prices in an election year.

While its domestic price at the pump remains among the world’s lowest, Venezuela continues to argue that OPEC should do more to defend the price of oil in global markets. Searching for support, the country continues to call for a special OPEC meeting, which would include non-OPEC members ostensibly for support, to discuss such measures. However, The Wall Street Journal reports that Persian Gulf members are less than enthusiastic about another forum in which perceived outsiders have a seat at the table.

While OPEC may not be ready to prop up the price, CNN reports that the Saudis may be “thinking the unthinkable”: easing gas subsidies and raising domestic energy prices. This comes after the IMF warned that the Kingdom could run out of cash in five years under current oil prices and spending patterns. The Kingdom is expected to run a budget deficit amounting to 21.6 percent of GDP this year--compared to 3.4 percent in 2014. Quartz has more on what could be a painful strategy for the House of Saud: keep the pressure up on low cost drillers abroad by increasing the price, and political pressure, at home.

While Saudi Arabia may be considering fueling the proverbial flames, Ricardo Soares de Oliveira warns of what he calls  “Angola’s Perfect Storm” in Foreign Affairs. With the government struggling to manage the economic implications of low oil prices and falling government revenues, de Oliveira points to an increasingly lopsided relationship with China, a plunging currency, and the little money left to grease the wheels of a system normally run with a heavy dose of oil-funded patronage. Growing discontent has resulted in increased government repression, and de Oliveira concludes that “in such a volatile atmosphere, it takes only a little friction to start a fire.”

Unfortunately for the Angolans, the Saudis, and the Venezuelans alike, what's gone down does not appear to be going back up anytime soon. According to The Wall Street Journal, companies are tightening their belts in anticipation of oil prices staying low through next year. These predictions are based on an oversupplied market and faltering Chinese economic growth--or as Keith Johnson in Foreign Policy calls it, a Chinese gut punch to the global oil market. However, as The Financial Times points out, predicting the oil price is anyone’s game, and as companies scale down and countries buckle up, all are along for the ride. This includes the International Energy Agency, which will release its 2015 World Energy Outlook on November 10. This year’s report will focus, among other things, on the question of a “lower oil price future.”

 

What to Watch

Polish Power Shift

In late October elections in Poland, one of the EU’s longest standing governments gave way to the election of the Law and Justice Party (PiS). The party, referred to as right wing, nationalistic, and eurosceptic, is also considered hawkish on Russia--and on energy security.   

Some observers fear the election result will translate into a more nationalistic Polish energy policy that is focused more on security considerations than climate concerns. However, others say it is too soon to start worrying. With just weeks to go before the commencement of the COP 21 climate conference in Paris, Politico predicts a ‘pricklier’ Polish foreign policy and an energy policy that digs in its heels on coal consumption.

It also remains to be seen what this election means for the still nascent Energy Union, as the PiS party chief (and the person assumed to be running the show) is no fan of Tusk, the plan’s author. Energy post has more on what this could mean for the European Union. And in case November 18th is too long to wait for an update on the state of the EU’s Energy Union, good news--you don’t have to. EU energy blogger Alice Stollmeyer has access to a draft of the speech. Spoiler alert: progress made, more to do, new market design coming 2016.

 

Frozen Conflict Heating Up

In an outcome that surprised no one, Azeri elections over the weekend resulted in a sweeping victory for Yeni Azerbaijan, the ruling party of Azeri President Ilham Aliyev. Mainstream opposition parties boycotted the elections while international observers like the OSCE were also absent, citing restrictions imposed by the ruling party that made monitoring all but impossible.

However, more attention may be paid to the oil producing country as some observers say the so called frozen conflict between Azerbaijan and Armenia over Nagorno Karabakh might be heating up at the same time the region is feeling the pull of larger geopolitical forces. However, Azerbaijan has a vested interest in keeping the peace with neighboring Armenia to the extent peace means stability--and a safe operating environment for oil and gas companies.

While any eruption of conflict between Azerbaijan and Armenia over the disputed NK territory is unlikely, the territory’s defense minister said Azeri oil production facilities would be targeted were hostilities to break out. Meanwhile, Armenian President Serzh Sargsyan has accused Azerbaijan of escalating the situation “with the use of heavy artillery,” ostensibly purchased with the fruits of oil and gas production. According to Bloomberg, hydrocarbon investment and revenue in Azerbaijan has enabled a “30-fold” increase in Azerbaijan’s defense spending over the last decade, and 2015 anticipated military spending exceeds Armenia’s entire state budget.

 

Great Game or Never Ending Story

While hostilities between the two neighbors certainly is not new, this renewed tension comes at a time when their respective patrons are also entangled in a geopolitical struggle. Turkey, whose border with Armenia remains closed and whose denial of the Armenian genocide serves as a major stumbling block to opening it, supports Azerbaijan. Meanwhile Armenia hosts the only remaining Russian military base in the region, and recently accused Turkey of violating its airspace.

Both countries are also at the intersection of energy politics as well, as Azeri gas from the supergiant Shah Deniz field is anticipated to help wean Europe off of Russian sources, while Iran looks to Armenia as a transit country for future supplies in a post-sanctions world--an outcome that Stratfor says Russia is hoping to avoid.  

To complicate matters further, al Nusra front has called on extremists across the region to attack Russian soldiers and nationals, many of whom still reside in former Soviet states, in retaliation for Russian involvement in Syria.

 

South China Se(a)izure

As China continues to reef hop around the South China Sea, debate over Chinese motives continues. While some point to the region’s hydrocarbon reserves as driving Chinese behavior, others say oil is a pretext for territorial ambitions. Regardless of whether Chinese claims are driven by a desire for maritime supremacy or mineral interests, energy security cannot be ignored as a potential factor. One-third of the global crude oil and LNG (Check out this CSIS map)  pass through the Strait of Malacca into the South China Sea.

However, if it is resources China wants, the area could hold huge potential--or huge risk with little payoff.

Whether or not the juice is worth the squeeze depends on who you ask. If the U.S. Energy Information Administration's (EIA)  estimates of 11 trillion barrels of oil and 190 trillion cubic feet of gas are correct, the South China Sea's reserves would be on par with Mexico's. Official Chinese estimates run much higher. However, these numbers have been called “guesstimates” and some think drilling in the region is a gamble not worth taking. Analysis by the EIA also indicates that the bulk of the region’s resources are largely located in undisputed territory, while the remainder lies in areas with challenging production conditions ranging from extreme drilling depths to typhoons.

Whether this is a struggle for maritime supremacy, territory, energy, or all three, keep an eye out for oil majors to jump into the fray and for any increased cooperation between CNOOC, the Chinese state owned oil company, and other companies and countries with offshore expertise.

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