PAVAN AGNI explores how energy and debt management intersect, offering key strategic lessons for emerging global powers like India
Any student of current affairs looking at the seemingly unconnected geopolitical events of the last nine months would be forgiven for wondering whether a larger pattern is emerging. Venezuela, Greenland and action on Cuba coming up. Iran War, Saudi Arabia in trouble and Intense sanctions on Russia. Vastly different politics and causal effects with each, yet one thread running through. Energy, Trade routes and Strategic Control.
Is Washington building its strategic position around the physical assets that underpin economic power – energy, minerals, shipping lanes, military bases? More important is it trying to revamp the entire financial system as we know? And Why now, one would ask, when we consider the enormous financial burden it carries. A fiscal deficit upwards of $1.9 trillion and a Debt to GDP ratio of 130% certainly doesn’t bode well, even when you can print your way out of it. If inflation rises, bond yields rise which makes refinancing more expensive exacerbating the fiscal deficit further.
This is where the pattern with oil at the centre plays out. America is now a major oil producer and is considerably less dependent on Middle Eastern crude than it was during the OPEC crisis. The developing world is not. And anyone who understands institutional markets knows that the price of an asset is not determined only by physical supply. Liquidity, positioning, expectations and the ability of large players to influence market conditions can magnify a supply shock into a much larger price movement. A disruption in the Strait of Hormuz does not merely affect Iran or Saudi Arabia. It affects inflation in Europe, Asia and America. It affects airline costs, shipping costs, plastics, chemicals, fertilizer, transportation and ultimately consumer prices. That makes control over energy flows strategically valuable even when you do not need the oil yourself.
Venezuela possesses some of the world’s largest proven crude reserves, now in control of Washington. Greenland not only has minerals but is also central to the arctic route which will become necessary for Russia, Europe and China when the Hormuz Strait becomes a chokepoint. And no President will miss the case study lesson of the 13 Days that JFK endured over Cuba.
With Iran knocked out of the Oil Equation and the Saudi Oil and indeed regime coming under fire for the first time in decades, Russia embargoed in a squeeze, the world’s energy bill rises. For the first time ever, this is not about supply shock from just a pricing perspective but the sovereign anxiety of availability itself.
And who ultimately pays the bill? Every economy that imports energy. From India to China to Japan to Europe and indirectly even the United States. Thus, if America’s objective were simply to push oil prices down, conflict in the Middle East would make little sense.
Or is it that the Strategy isn’t so much about cheap oil today than about control over the energy architecture of tomorrow. This is important because the US has the advantage that it not only produces its own oil but also the world’s reserve currency. The currency in which oil is traded globally and which is held by central banks as liquidity for trading in all commodity markets. It thus possesses the power over the world’s economy once it controls the oil, trade routes and the financial structure beneath both.
But this strategy also brings with it the inflation America cannot afford. Higher inflation increases treasury yields which increase the cost of refinancing America’s enormous debt. It also brings together the Iran, Russia, China block with Europe and India, on the other side, unlike ever before.
Or is there a larger master plan. Bretton Woods in 1944 and Nixon Gold unpegging in 1972 and now something more consequential? America does not need to “repay” its $40-plus trillion debt in the conventional sense. It needs to continually refinance it. That means the United States needs the world to keep believing that its bonds are safe, its economy productive, its currency indispensable and its financial system difficult to replace.
Geopolitics, energy and debt are therefore not separate stories. They are three sides of the same balance sheet. And perhaps the most important lesson for India is that geopolitical power is not just modulated only by having oil, the largest army or a growing economy. Its also a function of being able to influence the networks connecting energy, technology, capital and trade in the decades to come.