Civics · Law · Geopolitics: Energy Geopolitics

Oil has two unusual properties. First, demand is extremely inelastic in the short run: if the price doubles you will not immediately replace your car, because the stock of equipment is fixed. The demand curve is close to vertical, so a 2% disturbance on the supply side can be amplified into a 20% price swing. Second, production costs vary enormously: the marginal cost of the same barrel ranges from a few dollars to several tens of dollars, yet all of it sells at one price. That gap is resource rent, and it accrues to whoever controls the territory, not to whoever supplies the labour.

Rents change a state's fiscal type. Day 7 covered the binding of taxation to representation; oil revenue need not be levied on society, so the pressure running through that link is naturally weaker—this is the core of rentier state theory. A cartel's only levers, meanwhile, are quotas and spare capacity. But quotas are a prisoner's dilemma: the best individual move is to hold output while others cut. For a cartel to hold, some member must absorb the cost of adjustment over the long run.

• The 1973 Arab oil embargo: oil is a fungible, freely traded commodity, so a targeted embargo is arbitraged away through resale. What actually bit was the aggregate production cut, which raised the price for everyone. The institutional consequence was the founding of the International Energy Agency in 1974, with members obliged to hold reserves equivalent to 90 days of net imports.
• The Netherlands (Groningen gas field, 1959): surging exports pushed up the currency and squeezed manufacturing competitiveness—the origin of the term Dutch disease. Norway's answer was to convert resource revenue into financial assets through a sovereign wealth fund, but that requires strong fiscal institutions and low corruption to already exist: the institutions are the precondition, not a product of the oil.
• US shale (post-2008): the key change was not volume but system dynamics. Conventional projects take years from decision to first oil; a shale well takes months. Output now responds to price an order of magnitude faster, which erodes the pricing power of any single swing producer. The cost is steep per-well decline.

The "resource curse" camp: rents substitute for taxation, weaken accountability pressure, and fund the machinery of control. The strongest counter-argument: the causation may run the other way—weak institutions come first, which is what allows concentrated revenue to be captured by a few. Norway and Canada are equally resource-rich yet institutionally stable, and the long-run panel work of Haber and Menaldo reaches the opposite conclusion. Each side gives something up: if the first camp ignores the institutional precondition, its prescriptions produce rules nobody enforces; if the second is right, the point of leverage lies in institution-building, and that road is slower.

"Producers set the price." A cartel influences marginal supply and expectations; the price is still determined by global inventories and demand.

The transition does not change whether geopolitics applies; it changes where the vulnerability sits. Fossil energy is a flow: it must be supplied continuously, and a day cut off is a day short, which is what makes sea lanes and pipelines natural bargaining chips. Wind and solar are stock plus equipment: the fuel is free, local and cannot be embargoed, but the equipment and minerals must be imported first—after installation, operation barely depends on imports at all.

• France: nuclear supplied roughly 67% of electricity in 2024, so power is no longer exposed to imported fuel prices. The costs are path dependence on a centralised technology, an ageing reactor fleet, schedule and cost risk on new build, and the constraint that river temperatures place on cooling during heatwaves.
• Germany: the last three nuclear plants were shut on 15 April 2023. The transition period needs dispatchable gas as backup, which makes "where does the backup fuel come from" a geopolitical question in its own right—Russia's share of EU gas imports fell from about 45% before February 2022 to roughly 19% in 2024.
• Denmark: wind supplied about 60% of electricity in 2023, the highest share in the world, smoothed through strong interconnection with Norwegian hydro and the German grid. The limit is worth stating plainly: a small country's very high renewable share partly consists of borrowing a neighbour's flexibility.

"The transition improves security": sun and wind cannot be embargoed and have no production cartel, so over time energy spending shifts from rent paid abroad to capital invested at home. "The transition period reduces security": during the crossover both ends are thin—the old system underinvests because it expects to retire, while the new one cannot yet carry full load, and the new dependence may be more concentrated than oil ever was. The first view accepts heavy upfront capital; the second accepts the price and emissions cost of a longer fossil dependence. This is not about who is right, but about which period you would rather place the risk in.

"Renewables mean energy independence"—the import dependence on equipment and minerals remains, and interconnection deepens reliance on neighbouring grids. "The transition is just swapping power plants"—the bottleneck usually lies in hard-to-abate sectors and in grid permitting timelines.

"Critical" is not a synonym for "rare." It is a two-dimensional judgement: supply risk × economic importance. Rare earths are not scarce in the crust; the difficulty is separation and refining, where chemically near-identical elements must be split apart stage by stage—complex processing, costly waste handling, and a learning curve measured in decades.

What deserves more attention is how the concentration formed. Midstream refining is low-margin, capital-heavy and environmentally costly, so on pure commercial logic firms in many countries chose to exit; only after the concentration existed did anyone notice that this was the control point. The midstream thereby became a single point of failure—and precisely the cheap, unwanted segment that is easiest to leave off a risk register.

• The EU: the Critical Raw Materials Act, adopted in March 2024, sets 2030 benchmarks—extraction ≥10%, processing ≥40%, recycling ≥25%, and no more than 65% of supply from any single third country. Its character is targets without mandates, which leaves the bottleneck in member-state permitting and environmental review.
• Indonesia: an export ban traded for downstream capacity, keeping the industry onshore. The costs are friction with trade rules, and the fact that the gains and the pollution land on different populations.
• Demand-side substitution: battery chemistry has shifted partly from high-cobalt formulations to lithium iron phosphate, directly weakening dependence on any one mineral—minerals can be recycled and substituted; oil, once burned, is gone.

The "secure control" camp: a concentrated midstream is a policy lever available at any moment, and rebuilding refining capacity takes 5 to 15 years—that lag alone justifies the insurance premium, because building after the fact arrives too late. The "efficiency and interdependence" camp: diversification raises costs and slows the transition, while using the lever accelerates customer flight, so interdependence is self-limiting. The first pays in higher costs and local environmental conflict (the mine has to be dug near somebody's home); the second pays in the risk of being squeezed during a particular window.

"Buying overseas mines makes you safe"—the ore still has to go somewhere to be refined, so the control point has not moved. "Critical minerals will run out like oil"—reserves are generally ample; shortages come from lags in capacity and permitting.

"Energy security" almost never means self-sufficiency. It contains at least four mutually conflicting dimensions: availability, affordability, reliability and sustainability. The conflict is structural—reserve capacity bought for reliability raises electricity prices, while prices held down for affordability suppress investment. Policy is therefore fundamentally a ranking problem; Japan's S+3E framework is an attempt to write that ranking explicitly into policy.

A second distinction has to be made first: physical shortage versus price shock. Genuine cut-offs are rare; what is common is repricing—the goods are still there, they merely cost more, and those who cannot pay drop out first. Subsidising prices and securing supply are therefore two different policies, and confusing them usually means spending the money without gaining any resilience.

• Japan: an energy self-sufficiency rate of 15.2% (fiscal 2023, METI), among the lowest in the OECD. The strategy treats "cannot be self-sufficient" as a given and pursues extreme diversification instead—varied sources, long-term LNG contracts, overseas equity stakes and large reserves. The cost is higher energy prices and the rigidity of long-term contracts.
• Chokepoints: roughly 20 million barrels per day of crude and products passed through the Strait of Hormuz in 2025, equivalent to about 20% of global petroleum liquids consumption (EIA), with limited bypass pipeline capacity. This is exactly the Day 9 argument: geography is a constraint, not a determinant.
• Electricity reliability: if you are paid only for energy delivered, nobody will invest in a backup plant that runs a few dozen hours a year, so countries have made "capacity adequacy" a separate design objective—a gap in market design, not in technology.

"The state should lead": security has the character of a public good, and no firm will hold backup at its own expense for a once-in-a-century scenario, so that redundancy has to be created by policy. "The market should lead": price is the fastest regulator, and holding it down masks the scarcity signal, converting shortage from a price form into a physical one (queues, rationing). The first pays in ongoing carrying costs and the risk of backing the wrong direction; the second pays in the distributive consequences at the moment of crisis—a low-income household cannot ride out a hard winter by "using less electricity." This is why most countries end up with a hybrid.

"Energy independence means safety"—a net exporter still absorbs international price swings, because domestic producers can choose to export. "The bigger the reserve the better"—a reserve is a liquidity buffer, good for shocks lasting weeks to months and useless against structural dependence.