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Oil has shaped international conflict for decades. According to one estimate, twenty-five to fifty percent of interstate wars between 1973 and 2012 had oil-related linkages. 1 But the cyclical nature of oil’s contribution to global conflict is not well understood. Not only are oil prices cyclical, but the geopolitics of oil are linked inexorably to the same boom and bust price cycle.

Military adventurism, proxy wars and regional pathologies in the Middle East expand and contract with the ebb and flow of massive petrodollar accumulations related to the oil price cycle.

Hydrocarbons will continue to form the backbone of Middle Eastern economies

The Middle East’s energy transition continues to be slow and piecemeal, despite promises of large additions of renewable capacity in the coming years, the region still remains highly dependent on its fossil fuel reserves. In 2022, thermal power (coal, oil, and gas) accounted for 90% of the region’s power capacity. Although this power capacity share is expected to decrease, fossil fuels will continue to dominate, with GlobalData forecasting that by 2035, thermal power will still account for 70% of total capacity. A similar story emerges in the power generation mix, with fossil fuels being expected to account for 84% of the power generation mix in 2035.

With over 30,000 troops in the Middle East at multiple locations, the United States' commitment to the Middle East hasn't changed — despite the U.S. withdrawal from Afghanistan and its significant drawdown in Iraq, said the deputy assistant secretary of defense for the Middle East.

"The significant capabilities across our Navy, our Air Force, our Army and our Marines — it's still in the region," Dana Stroul told the Jerusalem Post during an interview yesterday in New York City. "And they're still doing those important activities every day."

The world’s oil traders are increasingly adopting an old slogan as they track crude prices and try to shield themselves from volatility: Don’t mess with Texas.

Traders swapped contracts for oil sold in Houston and Midland, key hubs of the Texas export boom, at a record clip on Feb. 8, according to exchange giant CME Group CME 0.57%increase; green up pointing triangle. By Monday, the number of outstanding agreements for such crude deliveries sat at a record high.

The massive inflow of petrodollar revenues when oil prices are high creates disposable incomes that can be easily dispensed on regional arms races, especially since oil consuming countries like the United States are incentivized to increase arms sales as a means of solving oil import related trade deficits. Besides transferring wealth from industrialized countries to oil producers in the Middle East and North African (MENA) region and Russia (and stimulating renewed drilling for oil and gas in North America), high global oil and natural gas prices also slow global economic growth and encourage energy conservation. This causes petroleum demand to slow globally, lowering oil prices. Social and political problems in the region reemerge as oil prices recede. Regional governments have fewer resources to spend on restive populations that have become accustomed to generous handouts enabled by high oil prices. Job creation and visible social programs slow, dissatisfaction rises, and the consequences of economic downturns incite support for militants. Ensuing instability forces governments to use newly purchased arms, which ironically begins the cycle yet again, as new conflicts disrupt oil supplies.

A week ago, the Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed to slash production by 9.7 million barrels, a deal that brought an end to a price war between two of the biggest exporters, Russia and Saudi Arabia.

But the coronavirus pandemic has made that deal irrelevant.

The world has failed to come to an agreement to stop burning fossil fuels. After two weeks of negotiations, a draft decision at the United Nations COP27 climate conference in Sharm El Sheikh, Egypt, promised a compensation fund for climate change damages but fell short of a push from the US and Europe for a “phase-down” of oil, gas and coal.

In fact, it’s worse than that. Although a phase-down of coal was agreed at last year’s Glasgow conference, other fossil fuels are going to remain immune. Twenty years from now, we are still likely to see global climate meetings failing to agree to a phase-down (let alone phase-out) of fossil fuels. And that’s OK — because what matters is not the words in an international agreement, but whether our carbon emissions are falling fast enough. On that front, the prospects are far better.

The world wants to “transition” away from fossil fuels toward green energy, but the difficult reality is this: Dirty fuels are not going away — or even declining — anytime soon.

The total amount of renewable energy that’s available is growing. That’s good news for a world threatened by potentially devastating climate change.

Democrat firebrands Rep. Alexandria Ocasio-Cortez and Sen. Ed Markey just unveiled their “Green New Deal,” a multi-trillion-dollar effort to overhaul the energy industry and slash America’s net greenhouse gas emissions to zero within a decade.

The legislation’s title is fitting. The original New Deal failed to create jobs and actually prolonged the Great Depression. This Green New Deal would be no different — it will destroy millions of jobs and push working-class Americans into poverty.

We're not hearing much about the "Green New Deal" these days, but it's still a priority for some candidates, as anyone who's attended a recent Bernie Sanders rally can attest.

Criticism of the GND tends to center on cost and rightly so. It would be extremely expensive. Researchers estimate it would take more than $5 trillion just to switch from coal, nuclear and natural gas to 100% renewables.

Low-carbon transition risks for finance arise from the abrupt structural change toward low-carbon industries that alters expectations about future revenue streams in high-carbon industries. A comprehensive theoretical framework explaining such sunset industry systemic risks for finance has hitherto been lacking because the theoretical and historical literature has tended to focus instead on historically more important risks from sunrise industries. Current academic research into transition risks tends to address either the real-economy structural change, or the financial impact, but does not typically connect the two. We contribute to the conceptual understanding of transition risks by developing a consistent theoretical framework of the drivers, transmission channels, and impacts of the phase-out of carbon-intensive industries on the financial system.

High-carbon industries could abruptly become uncompetitive due to a rapid change in climate-mitigation policy, low-carbon technology or preferences, or a widespread change in expectations of their impacts. These transition drivers cause physical assets to lose their ability to generate revenue, and if this is unanticipated, they become stranded. Asset stranding combines with other transition costs, notably unemployment, losses in profits, and reductions in real incomes from price changes that generate significant risks for portfolio losses and debt default. Financial actors might become unable to service their own debt and obligations, creating loss propagation within the financial network. The adverse impact of credit tightening and lack of confidence as well as the direct impact of transition costs on the macroeconomy, could lead to a general economic crisis with further risks for finance. None of this suggests that financial markets would be better off without or with a limited transition: delaying climate-change action would only necessitate an even more rapid and potentially more damaging transition in the future, while exposure to physical risks under unmitigated climate change would be drastically increased. Targeted financial policies, however, can dampen some transition risks by direct regulation of the financial sector.

Stranded asset risk is relevant for the energy sector and beyond. Most fossil energy assets are long-lived; they usually require a large initial investment, but have relatively low operating costs. Davis and Socolow (2014) show that expected future cumulative emissions from the existing infrastructure of the global power sector have increased dramatically in the last decades. Such long-term investments have the potential to “lock in” carbon-intensive technologies for a long period of time (Erickson et al., 2015).42 Calculations by IEA (2013) and Pfeiffer et al. (2016) conclude that the “2° capital stock” will already be reached in 2017. Investments in fossil capacities after 2017 are inefficient: they lead to “both larger carbon lock-ins and higher short-term emissions that need to be compensated by deeper emissions cuts in the long run” (IPCC, 2014), increasing the cost of climate change mitigation. Moreover, in order to achieve emission cuts in such a scenario, fossil assets need to be stranded. IEA (2013) provides a conservative estimate that the energy industry faces sunk costs of $ 120 billion due to fossil fuel plants being retired early, even if action to achieve the 2°C goal had started in 2012. For a scenario of delaying climate action until 2030 (and using a different methodology), IRENA (2017a) estimates stranded assets of $ 1.9 trillion in electricity generation, and an additional $ 7 trillion in upstream energy infrastructure (mostly oil production). This is approximately equivalent to 3.5% of global income, and implies a risk not just for the obviously affected energy industry facing sunk costs: international organizations, financial institutions and regulators are increasingly concerned about the “transition risk” of climate policy, especially about a sudden re-pricing of assets.43

A sudden devaluation of energy companies will occur only if expectations were not adjusted in accordance with the risk of asset stranding. Sudden changes in the stringency of carbon policies, or expectations in the presence of tipping points can lead to abrupt repricing of fossil fuel assets. Given energy companies' size and interrelation with the rest of the economy, policymakers may regard energy companies as “too big to fail.” For this and other political economy reasons,44 policymakers may opt for compensation policies, and investors may expect them to do so. Compensations, then, are almost a self-fulfilling prophecy: if they are expected, they will be necessary in order to avoid larger shocks.45 Therefore, understanding the interaction between policy making and investors’ expectations is essential for the design of climate policies. Our results suggest that early and credible commitment to climate policies and whether they involve compensation payments or not is crucial. Such clear signals to financial markets can avoid a disruptive and unorderly energy transition and macro shocks, while directing capital towards climate-friendly technologies. We believe that further research in similar contexts can help to generalize these results, or to identify the important factors in the formation of expectations regarding climate related risks.

Algeria, Chad, Iraq and Nigeria will be among the first countries to experience political instability as oil producers feel the effects of a transition to low carbon energy production, according to a new report from risk consultancy Verisk Maplecroft.

In its 2021 Political Risk Outlook, published Thursday, the firm cautioned that countries that had failed to diversify their economies away from fossil fuel exports faced a “slow-motion wave of political instability.”

The distribution of ownership of transition risk associated with stranded fossil-fuel assets remains poorly understood. We calculate that global stranded assets as present value of future lost profits in the upstream oil and gas sector exceed US$1 trillion under plausible changes in expectations about the effects of climate policy. We trace the equity risk ownership from 43,439 oil and gas production assets through a global equity network of 1.8 million companies to their ultimate owners. Most of the market risk falls on private investors, overwhelmingly in OECD countries, including substantial exposure through pension funds and financial markets. The ownership distribution reveals an international net transfer of more than 15% of global stranded asset risk to OECD-based investors. Rich country stakeholders therefore have a major stake in how the transition in oil and gas production is managed, as ongoing supporters of the fossil-fuel economy and potentially exposed owners of stranded assets.

The transition to a global low-carbon economy entails deep and fast structural change that poses challenges for economic adjustment everywhere1,2. One key challenge both for the real economy and financial markets is the fast phase-out of fossil-fuel production, which will necessitate the write-down of major, functioning capital assets and reserves reflected as assets on fossil energy companies’ balance sheets. But while over 100 studies have analysed scenario-contingent early retirement of fossil-energy supply facilities3, this retirement has not been linked to financial ownership. As a result, academic and regulator studies undertaking stress tests of the financial system start from synthetic shocks to financial assets, rather than the underlying real assets4,5,6. The distribution of financial ownership and exposure to loss risk remains insufficiently understood.

Deterring the burning of fossil fuels is crucial to reducing the accumulation of heat-trapping greenhouse gases in the earth’s atmosphere. A carbon tax could discourage the use of fossil fuels and encourage a shift to less-polluting fuels, thereby limiting the carbon dioxide (CO2) emissions that are by far the most prevalent greenhouse gas.

According to the World Meteorological Organization, without measures to reduce greenhouse gases, global temperatures are projected to rise by about 4°C above preindustrial levels by the end of the century (temperatures have already increased by 1°C), with rising and irreversible risks of collapsing ice sheets, disruption of ocean circulatory systems, inundation of low-lying island states, and extreme weather events.

To effectively address the massive threats arising from climate change, globally, much bolder steps are needed towards decarbonization. Yet, since the energy transition substantially transforms socio-economic models, trade patterns, and global power dynamics, the path towards net zero itself comes with a huge potential for disruption. For both challenges – stepping up efforts to mitigate global warming and managing risks arising from the energy transition – international cooperation is needed. However, as both climate and energy increasingly become an arena of geopolitical competition, enhanced collaboration is facing massive challenges.

Not Green Enough

In the model I assume, realistically, that today not all but only some of the policy-oriented group of countries (the “policy bloc”) have established a climate policy, and in a fully coordinated way. Other fuel-importing countries (the “fringe”) have no policy. They act in an uncoordinated fashion, and each country is small and has no market power. The producer countries as group, and the policy bloc as a group, are however both assumed to behave non-competitively in the fossil fuels markets, so that policies are fully coordinated within each of these two groups. Policies are not coordinated across these two groups. The model is static by focusing on shortrun demand and supply relations. Many further issues are not directly addressed by this paper, in particular, the issue of fossil fuels as exhaustible resources.7 In particular, Sinn’s (2008) “green paradox” argument, that carbon pricing could lead to increased emissions in the short run, is ignored.8

I then show that a tax solution is preferred to a cap-and-trade (c-a-t) solution, for both the policy bloc and the fringe. The difference lies in the response of a monopolistic fuel exporter, setting the fossil fuel export price, to a tax versus the response to a cap. Generally, importers’ demand for fuel will be less elastic when some of these countries set a cap. This effect is stronger when the policy bloc is larger. The demand function will then be less elastic, leading to a higher fuel export price. This hurts both the policy bloc and the fringe.

The inflation level in Russia is currently among the lowest across the world, Prime Minister Mikhail Mishustin said on Tuesday at the meeting on economic issues.

"Inflation remains moderate. It stood at 2.9% from January to early July, which is much lower than last-year values," Mishustin said. Inflation in annual terms is not above 3.5%, he noted.

Russia said last week that it wants the European countries that buy its natural gas to make their payments in rubles, rather than dollars or euros. A month ago, that might have seemed like a pretty good deal: The ruble was down 40%, at 139 rubles to the dollar, in the wake of Russia's invasion of Ukraine.

Since that low point on March 7, however, the Russian ruble has staged a dramatic recovery. At the time of this writing, it was trading at 84 to the dollar, which is right back where it was at the time of the invasion. And this is no dead cat bounce. It's a sharp and sustained recovery that made the ruble the world's top-performing currency in March.

Asset stranding and significant falls in values in the fossil fuel industry are not new, the recent commodity price slump has stranded many projects already and fossil fuel companies have seen the value of their assets reduced by many millions of dollars. However, the scale of such an outcome under, for example, an effective global climate policy would be entirely new. It would also imply a permanence not normally considered during commodity price slumps. For example, figure 3 shows estimates of the proportion of reserves already discovered that could become permanently stranded if the world keeps to its carbon budget