EUobserver opinion: The US energy pivot and Europe’s oil dilemma

On 5 December 2014 oil prices hit a new five-year low.

Since then, prices slumped further, dipping below the $50 mark, before bouncing back to a low $60 in late February after oil majors began announcing cuts in their capital expenditure.

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  Washington's move towards energy independence is good for the US but less so for Europe. (Photo: Notat)

Some of the factors that led to 2014’s summer highs of US$110 per barrel have been removed: high demand, decreased supply and a strong US dollar.

The US is now bringing online its oil resources and this is having a structural impact on global oil markets and will continue to do so this year - this will unnerve OPEC.

Low oil prices for developed countries is positive news as it can lower consumer prices, needed in an era of low economic growth for the West.

Yet for fragile oil-exporting states, the picture is less positive. A prolonged period of low oil prices will negatively impact a number of fragile states.

Low oil prices and slow global economic demand will increase pressure on petro states to maintain social spending. Government spending in these countries is seen as a pressure valve for internal unrest.

Although reports are emerging that even Saudi Aramco is facing pressure from the low oil prices, many Gulf nations are still fabulously wealthy, and can ride out the storm.

The same is not true of countries such as Venezuela, Nigeria, Russia, Iraq and Libya.

The decision by OPEC to not lower production to counter the low oil price is aimed at preserving market share against higher cost producers such as Russia, Venezuela, and American shale producers.

So far, that strategy appears to be having mixed success.

Geopolitical risks for Europe

When it comes to the ‘rig count’ in the US, there has been a drop of 469 units since October.

Many analysts believe this is a sign that expensive unconventionals are being knocked out of the market. Coupled with under-investment by Western oil majors, this would mean that the price of oil will bounce back.

However, that line of reasoning does not take into account that most of the now off-line rigs were in marginal areas.

Furthermore, the industry has become more efficient and costs have been greatly reduced.

And this does not even touch upon the biggest elephant in the room: the chronic mismatch between supply and demand.

The current supply glut is estimated to be around 2 million barrels a day. Many countries and companies are taking advantage of the price and stocking up on oil supplies.

However, this cannot go on forever.

If storage space starts to run out, this oil will make its way to the market again, pushing prices down once more.

Unless these barrels disappear, it is unlikely the price of oil will rise strongly anytime soon. So 2015 is likely to be another tough year for the world’s oil-exporting countries.

The combination of low oil prices and the potential for instability in oil-producing countries poses a direct geopolitical risk for Europe.

This is particularly so as the US is pivoting towards the Asia-Pacific and Europeans lack the resources to play a greater role in the neighbourhood.

Europe's 'black gold dilemma'

The combination of the US’ diminishing presence in the Middle East - a void that could be filled by other powers - and lower oil prices mean Europeans will need to take on a greater security role in the region.

While the US maintains strong political ties to the Middle East, overall government funding for overseas operations is $26.6 billion less this year than in 2014.

It is worth noting that the US backed down over intervention in Syria, while terrorist group ISIS was allowed to spread before airstrikes (not land forces) were launched.

Increasing US energy independence - if it is allowed to happen - may seem like a deft strategic move by Washington.

Yet given Europe’s geographical proximity to potential and actual crisis zones in the Middle East, it is bad news.

In the long run, the drive for energy independence may backfire if Europe is left to deal with the region by itself.

The Arab Spring began in Tunisia with protests about food prices, Europe had little influence over events on the ground once things spun out of control.

Further oil-price-inspired crises in the region would be similarly disastrous for Europe.

EU states should keep one eye on oil prices and the other on Washington’s longer-term strategy for the Middle East. These two factors are likely to impinge directly on European security.

Without America’s presence in the very region where most oil shock-related crises are likely to spring up, Europe’s underbelly will be left vulnerable.

This is all the more worrying because Europe has control neither over oil prices or US strategy.

Dr. Sijbren de Jong is a Strategic Analyst at The Hague Centre for Strategic Studies, Daniel Fiott is a researcher at the Institute for European Studies, VUB Brussels and Jasper Ginn is Assistant Analyst at The Hague Centre for Strategic Studies.