- Geopolitics and energy have always been linked, and U.S. sanctions against Iran and Venezuela have disrupted global oil flows in recent years. But since the end of the Arab oil embargo of the early 1970s, the relatively free trade of commodities, backed by U.S. military and financial might, has been a hallmark of the international system.
That is now changing. During a speech in April, U.S. Treasury Secretary Janet Yellen said that in the wake of Russia’s invasion, it was time to redesign Bretton Woods, the system of trade rules adopted in 1944 that prioritized economic efficiency and international cooperation. Ms. Yellen advocated for “friend-shoring” supply chains of critical raw materials by deepening trade ties with “a group of countries that have strong adherence to a set of norms and values.”
- But in addition to economic nationalism and deglobalization, the coming energy order will be defined by something that few analysts have fully appreciated: government intervention in the energy sector on a scale not seen in recent memory. After four decades during which they generally sought to curb their activity in energy markets, Western governments are now recognizing the need to play a more expansive role in everything from building (and retiring) fossil fuel infrastructure to influencing where private companies buy and sell energy to limiting emissions through carbon pricing, subsidies, mandates, and standards.
This shift is bound to invite comparisons to the 1970s, when excessive government intervention in energy markets exacerbated repeated energy crises. The dawning era of government intervention won’t be a bad thing, however, if managed correctly. Appropriately limited and tailored to address specific market failures, it can forestall the worst effects of climate change, mitigate many energy security risks, and help manage the biggest geopolitical challenges of the coming energy transition. The current energy crisis has refocused the world’s attention on geopolitical energy risks, forcing a reckoning between tomorrow’s climate ambitions and today’s energy needs and offering a preview of the tumultuous era ahead. How governments respond to these challenges, brought into sharp relief by Russia’s invasion of Ukraine, will shape the new energy order for decades to come.