While the heads of Western governments and financial organisations were firefighting the unexpected result of Britain’s Brexit referendum last weekend, a much greater threat to Western economies was occurring on the other side of the planet.
According to Denis Dyomkin at Reuters:
“Russia and China sealed a raft of energy deals during President Vladimir Putin’s visit to Beijing on Saturday, strengthening economic ties while pledging to preserve the strategic balance of power among nations.”
At face value, this cooperation between neighbours, during a global oil and gas glut that has helped maintain low energy prices, seems unimportant. But this is to misread the geopolitical implications.
Despite claims in the US media, recoverable reserves of US shale oil and gas amount to less than a decade of US consumption at current levels. In Europe, meanwhile, the North Sea looks like a war zone with more than a quarter of a million job cuts either already made or in the pipeline. Even before these cuts, North Sea fields were producing less than a third of their 1999 production peak. Despite continuing to produce vast amounts of oil and gas, most of the Middle East oil and gas fields are also past their peak. The current slump in prices is largely due to a fall in demand in the West rather than any large-scale ramping up of production.
Unless the world enters a prolonged period of stagnation, in the near future, oil and gas demand will exceed supply. At that point, the key issue will not be how much oil and gas is in the ground, or even how much is being produced. The key question will be “how much is available for export?” Norway and Saudi Arabia are desperate to maintain exports – that is why both are using their sovereign wealth funds to install as much renewable energy technology as possible in order to wean their domestic economies off oil. China is also investing heavily in renewables, but it has also been entering into multi-lateral deals to exchange infrastructure for oil and gas with countries in Africa and Asia. The Russian deal looks like a further development in this direction.
What this means is that the amount of oil and gas freely available on world markets will collapse at some point in the next decade even if production levels can be maintained. This spells more or less immediate ruin for European economies that have been net energy importers for the best part of a decade and, aside from building a raft of synthetic oil plants to turn coal into oil, will be entirely dependent on imported oil for their survival. America will not be riding to the rescue because its oil and gas supplies – including those in Canada and Mexico – are barely sufficient for its longer-term requirements. Europe’s other great energy hope – Russia – looks set to turn its attentions to the east; correctly recognising that economically, Europe (including the UK) is a busted flush.