Energy in an Era of Frenemy Foreign Policy
May 30, 2018
One feature of U.S. foreign policy in the Trump administration is that no country is quite sure where they stand. Allies feel treated like adversaries and adversaries, despite some “fire and fury” rhetoric, see potential gains from acting like friends. This “frenemy” dynamic arises from the fact that long-held tenets of American foreign policy and norms of diplomacy don’t carry much weight for the Trump administration, replaced instead by a penchant for a hyper-personal form of deal making. To be unencumbered by strictures of foreign policy norms and expectations can be both an asset and a liability. On one hand, it can create new and unexpected opportunities to address important issues that fly in the face of what traditional foreign policy analysts thought possible or where previous efforts have failed. On the other hand, the Trump administration’s propensity to rile allies and praise and protect adversaries makes it hard to understand the potential direction of U.S. foreign policy on a range of security, trade, and economic issues.
All of this has important implications for the energy industry—an intensely international business with products and services traded across the world, globally integrated supply chains, and energy portfolios full of long lead-time projects and long-lived capital investments spanning every continent. On some level, energy is an important part of the Trump administration’s economic development and foreign policy agenda as articulated through a policy of “energy dominance” or the newer vintage slogan “new energy realism,” but on another it is subservient to the broader foreign policy context, an approach that has left the industry scrambling to adjust to the new contours of U.S. thinking on energy.
First, government and corporate leaders have quickly learned that investing in or trading with the United States is one reliable avenue to curry favor with this administration. The most recent example of this is China's agreement to buy more U.S. oil and natural gas as part of a package deal to postpone the looming trade war the Trump administration had threatened to start over unfair Chinese subsidies and intellectual property rights practices. It is worth noting that China already wanted to buy U.S. oil and natural gas anyway, and the core issue about unfair Chinese trade practices remain unresolved. This kind of commodity-export-led diplomacy is somewhat strange because neither the development of exportable energy resources nor the commercial terms under which investments are made are determined by the U.S. government by and large (although the government can have an indirect impact through tax and tariffs decisions). It does not, however, seem strange to the Chinese who are used to making mercantilist deals with other countries where government agreements underpin future commerce.
Second, companies seeking to do business in countries with whom the United States has a mixed outlook need to employ caution. This includes obvious places like Iran, North Korea, Cuba, Syria, Russia, and Venezuela but also some less obvious countries like Mexico, Canada, Japan, and some in Europe. This is particularly true because the administration has repeatedly shown that, when it comes to negotiating with other countries, issues that have very little to do with one another can all be used as bargaining chips. Take for example the hierarchy of issues with Mexico: immigration, border walls, steel tariffs, and North American Free Trade Agreement (NAFTA) negotiations. All of them are interrelated in today’s foreign policy context, and one gets the sense that energy trade with Mexico could be held hostage as a bargaining chip in the negotiation of those other issues. In some ways, this has always been true of relations between and among countries, but the freewheeling nature of the administration’s approach to negotiations, in addition to the sheer number of economic and geopolitical issues it is juggling simultaneously, makes the potential landscape for negotiations very complex. In the case of Mexico, it seems particularly strange that the United States is not doing more to support increased investment in the Mexican energy sector, something the United States had been eagerly anticipating for decades, and to champion the cause of greater North American energy trade.
Third, multilateral efforts to advance an energy agenda seem particularly fraught under this administration due to a stated preference to deal bilaterally rather than through institutions and due to the chronic understaffing of those groups charged with the management of existing multilateral engagements. Under previous administrations, new multilateral groups were created, and these groups set the tone for the expectations between and among governments on the U.S. energy agenda. And while both Energy Secretary Rick Perry and Interior Secretary Ryan Zinke have signed memorandums of understanding with several countries on areas of mutual interest, in aggregate it is unclear that there is a coherent strategy with clear implementation plans to support a specific agenda. The most promising areas for an agenda to emerge is on the development of clean coal technology (carbon capture and sequestration among others), nuclear, and natural gas—all things the United States hopes to sell to other countries. Many multilateral institutions and groups have tried to adjust the agendas of their organizations to keep the United States involved, but for now those efforts appear more designed to maintain a sort of membership status quo than to constrain or influence the United States in a major way.
Fourth, frenemy foreign policy is changing both appraisals of geopolitical risk and actual geopolitical alignments (although it is not clear how permanently). The basic security environment is new and more tense across the Middle East, across Asia, and anywhere near Russia’s sphere of influence—all areas deeply important for the energy sector. The decision to pull out of the Joint Comprehensive Plan of Action (JCPOA) is a good example of this. Faced with the prospect of the reimposition of sanctions, most Iran experts have predicted that Iran will escalate its proxy activities throughout the region. Given how many missiles are coming out of Yemen toward Saudi Arabia these days, along with the deep concern in Israel over the growing presence and strength of Iran in Syria, these tensions should not be ignored. This is also creating other foreign policy realignments elsewhere around the world. Certain European leaders have acknowledged they cannot rely on the United States to the same degree they have in the past and are looking to neighbors far and wide to fill the void. Japan and China are reconnecting as the countries of the Asia-Pacific region reassess their security priorities in light of the U.S. abandonment of the Trans-Pacific Partnership and the potential for a new security arrangement vis-à-vis North Korea. Should the United States proceed with pulling out of the JCPOA and fail to find a supplemental agreement to save the broader international arrangement, Iran will need China and Russia more than ever for trade and diplomatic reasons, not to mention India and Turkey as well. Commercial diplomacy, including energy, will likely be part of this realignment, driven by not only energy market needs but by a desire to deepen and strengthen ties wherever possible. To be clear, many of these countries are not natural allies; indeed, some of them could be aptly described as frenemies of each other as well. But the absence of clear, steady, and predictable U.S. leadership has created a need for everyone to find potential alternatives.
Just because this new brand of foreign policy is difficult to decipher and even more difficult to respond to doesn’t mean countries aren’t trying. Indeed, patterns are emerging that can offer some clues about what matters most and what to watch for going forward. First, the administration is fundamentally driven by domestic politics, which can serve as a trigger for and shaper of action. For example, several major foreign policy announcements have been made during times of a bad domestic news cycle (a tried and true trick in American politics) rather than an externally relevant calendar. Campaign promises also shape what and how decisions are taken (to be fair, this is true of many recent administrations). Since candidate Trump was so strident on a great many foreign policy issues on the campaign trail, this translates into foreign policy announcements and overtures that are equally dramatic and brusque. Second, very few of the administration’s policy pronouncements are conclusive. Most seem to have the goal of starting a negotiation. The pattern thus far is to say something very strong and shocking, force a negotiation, and compile a list of challenging if not unreasonable or impossible conditions. What is not clear is whether any of these negotiations will ever be successfully concluded or if this will be an extended game of kick the can down the road to an ongoing negotiation (as seems to be happening with NAFTA, China, and North Korea at present).
Right now, the world has been operating as a shock absorber to this new U.S. brand of foreign policy—placating our harsh language, not overreacting to our unorthodox tactics, and trying to maintain an order that the United States used to defend. It is worth wondering if countries will grow tired of playing this shock absorber role or if at some point other countries will out maneuver the United States and make us look foolish, in true frenemy style. Some companies and governments will find this relatively chaotic environment a time for prudence and risk aversion, while others will take advantage of previously unavailable opportunities.
Under this current geopolitical dynamic, energy is subordinate to other security, trade, economic, and geopolitical objectives. That is of course until oil prices rise and the politics of U.S. oil supply and price security rears its head. This was the case last week as rising gasoline prices going into Memorial Day weekend sparked a wave of political and news media stories about the role of OPEC in managing oil prices, about which President Trump had tweeted his displeasure only several weeks earlier. In turn Saudi Arabia and Russia announced a possible decision to add more barrels to the market to manage high prices, a move that moved prices but was reportedly unpopular among smaller OPEC countries. Moving into hurricane season with higher oil prices, the United States typically starts to consider the value of the global energy trading system, a system the United States long championed in the name of shared global interest and greater resilience through interdependence in the face global supply disruption. In times of tight markets and oil supply disruptions, the United States has historically approached its friends and allies for coordinated responses to put additional supply on the market, take measures to increase efficiency, or in certain circumstances, draw down on emergency reserves. In a frenemy foreign policy world, where all favors and actions are considered in the context of an ongoing and uncertain negotiation over myriad issues, let’s hope this complexity does not come back to bite us.
Sarah Ladislaw is a senior vice president and director of the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
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