Analysis & Opinions - World Politics Review

Is Geopolitics Still a Source of Volatility in Oil Markets?

| Oct. 27, 2017

The revolution in shale oil production in the United States has had a major impact on global energy markets, leading to the collapse of energy prices but also limiting their vulnerability to geopolitical instability. In an email interview, Meghan L. O’Sullivan, the Jeane Kirkpatrick professor of the practice of international affairs at Harvard University’s Kennedy School, where she directs the Geopolitics of Energy Project, and the recent author of “Windfall: How the New Energy Abundance Upends Global Politics and Strengthens America’s Power,” discusses what a rebalancing of supply and demand will mean for geopolitics going forward, if a supply gap is on the horizon, and how shale has boosted U.S. hard and soft power.

WPR: The significant oversupply of oil markets has cushioned oil prices from a lot of the geopolitical turmoil in the world over the past few years. With the markets rebalancing, do you foresee geopolitics having more of an impact on energy markets? 

Meghan L. O’Sullivan: I do anticipate that geopolitics will influence global oil prices more significantly in the coming years than they have in the past few. There are two reasons behind my thinking, and one important caveat. First, many unfolding geopolitical situations are likely to increase the price of oil, rather than diminish it—as, say, the nuclear deal with Iran did. From the crisis in Venezuela to the conflict over independence between Iraqi Kurds and Iraq’s central government to the possibility of the United States withdrawing from the nuclear deal with Iran—each runs the risk of further increasing the price of oil by removing oil from the market. The second reason to believe geopolitics will have more influence on price is, as you mention, the rebalancing of markets. This rebalancing is very gradual, but if trends continue, the oil supply overhang that has existed for several years will shrink. When oil supply and demand are more balanced, there will be less of a supply cushion to absorb any supply disruption that results from geopolitical events. 

Yet while geopolitics may well re-exert its influence on the price of oil, one important new development will continue to have a dampening effect on price: the existence of tight oil or shale oil. Because this new resource responds so much more quickly to price than conventional sources of oil, a price spike—whatever its source—will be less durable. Higher prices will invite more tight oil onto the markets in a fraction of the time it would have taken in past years to get a similar response if, for instance, Venezuelan production plummeted and seemed likely to stay off-line for some time to come. 

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For Academic Citation:Is Geopolitics Still a Source of Volatility in Oil Markets?.” World Politics Review, October 27, 2017.