Pushed along by geopolitical upheaval increasingly reminiscent of the 1930s, global energy markets are polarizing. Rhetoric between nations is heated, economic disengagement has emerged as a core foreign policy consideration, and governments are being pushed to delineate between their friends and foes. Nowhere is this more evident than in global energy markets, ranging from oil and gas to renewable energy. 

On one side of the energy divide is a loose-fitting authoritarian construct driven by China and Russia, including Iran, North Korea, and Venezuela; the other side encompasses North America, Europe, and economically advanced countries of Asia with links to parts of Africa, Asia, and Latin America and the Caribbean. A number of other countries, many of them in the Organization for Petroleum Exporting Countries (OPEC), sit uncomfortably in the middle. The trend toward two different energy market systems is likely to accelerate as geopolitical competition intensifies in the years ahead.

Oil and gas markets are dominated by the United States, China, Russia, and OPEC countries (the chief of which is Saudi Arabia). These countries preside over a complex network of energy exploration, supply chains, industrial products, and major multinational corporations and state-owned companies. Traditional elements of global energy trading are the use of the U.S. dollar for transactions, internationally accepted business standards that provide transparency, and Western-dominated financial institutions. In recent years, this system, which was relatively open and conducive to large energy flows between Russia and Europe and the Persian Gulf and China, has become more politicized and opaque.

The reasons for the shifting nature of global energy markets can be found in four overlapping developments. The first is the revitalization of the U.S. oil and gas industry. American oil production slumped in the second half of the twentieth century, leaving the North American economy dependent on external sources, such as Saudi Arabia, Iraq, and Venezuela. However, national security considerations, the need to gain greater energy independence, and the harnessing of new technologies, such as fracking, brought once-barren oil fields back to life and facilitated the discovery and tapping of vast gas reserves. As a result, in the first two decades of the twenty-first century, the United States re-emerged as a major exporter in global energy markets. In March 2024, the U.S. Energy Administration announced that the United States “produced more crude oil than any country, ever.” 

The second development is the use of economic sanctions by the West. The motivation for imposing sanctions, usually leveled against individuals and companies, is to cause economic pain and force behavior modification from a particular government (like Iran and North Korea with their nuclear weapons programs) or reduce incentives to engage economically with other sanctioned countries. Both U.S. and European economic sanctions have been used against oil and gas exporters Iran, Russia, and Venezuela, as well as oil and gas consumers China and North Korea. While economic sanctions disrupted the energy market, the affected countries have created parallel channels to weather most sanctions successfully.

The third development is that China and the United States are in a new Cold War. Beijing wants to replace the United States as the global hegemon by disparaging the United States’ role in the world, using economic statecraft through such programs as the Belt and Road Initiative, reducing its exposure to U.S. financial instruments (such as U.S. Treasury bonds), and securing its global supply chains, especially for oil and gas as well as critical materials needed for electric vehicle and battery production. The last set of commodities mirrors China’s dominant role in renewable energy, controlling more than 80 percent of the global solar panel manufacturing market and 65 percent of global wind capacity while dominating electric vehicle and battery production. The United States and the West are struggling to catch up. While China intends to dominate the new energy landscape, it will continue to use oil, gas, and coal as a bridge to a more carbon-neutral world.

The fourth development is the Russo-Ukrainian War, which broke out in February 2022. The Russian invasion was a major catalyst in the momentum toward parallel energy ecosystems. In 2021, Russia accounted for 45 percent of total gas imports for the European Union (EU) and was one of its major sources of oil. Although the EU still imports Russian oil and gas, there has been a major effort to disengage and develop other sources, such as Angola and Guyana. Yet, it is the United States that has replaced Russia as the EU’s major source of oil while also accounting for 46 percent of liquified natural gas (LNG) imports in 2023. Closer U.S.-EU energy cooperation is likely to continue.  

While the combination of the above factors is pushing for greater energy interdependence and cooperation between the United States and Europe as well as from a handful of Global South oil and gas producers, it is also pushing greater cooperation between China, Russia, Iran, North Korea, and Venezuela. In 2023, Russia became China’s largest oil supplier, overtaking Saudi Arabia. Russian oil exports to China amounted to a little over $60 billion, accounting for 19 percent of China’s oil imports. Russia is also a major natural gas supplier to China, which is seeing record numbers in 2023 and 2024 and is another critical source of trade for the Russian economy.

Another component of the polarizing energy system is the Iran-China-Russian triangle. Western sanctions on Iranian and Russian oil and gas, as well as financial intermediaries, have resulted in an opaque exchange system that functions outside of the Western economic system. As the Atlantic Council’s Kimberly Donovan and Maia Nikoladze observe: “Iran, Russia, and China have created an alternative market of sanctioned oil, wherein payments are denominated in Chinese currency. This oil is often carried by ‘dark fleet’ tankers that operate outside of maritime regulations and take steps to obscure their operations.” The results of this system are badly needed capital inflows for Iran and Russia, cheap oil for China, an erosion of Western sanctions, and a reduction in the importance of the U.S. dollar in global trade. The depth of the China-Iran relationship is evident in the fact that in June 2024, China imported 87 percent of Iranian oil.

Iran and Russia have also come closer since 2022. The two countries signed a trade agreement in December 2023, moved away from dollar-denominated trade, and Tehran has sold weapons (drones) to Russia for its war in Ukraine. Two other components of the emerging bipolar energy markets are the diplomatically isolated duo, North Korea and Venezuela. Venezuela, once one of the wealthiest countries in the Western Hemisphere, is now one of the poorest. The fraudulent July 2024 elections only reinforce its dependency on the authoritarian club, especially for oil sales.

Driven by geopolitics, the two blocs are creating their own economic energy systems based on intra-bloc trade, investment, currency use, and market development. This undermines common links between both sets of countries, plays into deglobalization, and reinforces a sharp-elbowed us-versus-them perceptual framework. It also casts a shadow over many oil and gas producing countries like Brazil and Ghana, as well as OPEC, that do not want to be drawn into picking a side. The polarization of energy markets becomes even more complicated when considering the emergence of renewable energy. 

Policymakers have two options: further secure their global supply chains and deepen their own energy efforts or conduct the heavy-lifting type of foreign policy required to defuse an increasingly polarized world and avoid a deepening economic disengagement. Considering the current state of affairs, the first option is likely to prevail, something that needs to be considered by whoever sits in the White House in January 2025. The polarization of energy markets is going to continue, reflecting the widening geopolitical divide between two very different sets of countries with the potential endgame of an international economic system akin to the 1930s, broken and polarized by a network of tariffs and sanctions overshadowed by geopolitical rivalries.  

Dr. Scott B. MacDonald is the Chief Economist for Smith’s Research & Gradings, a Fellow with the Caribbean Policy Consortium, and a Research fellow with Global Americans. Prior to those positions, he worked for the Office of the Comptroller of the Currency, Credit Suisse, Donaldson, Lufkin and Jenrette, KWR International, and Mitsubishi Corporation. His most recent book is The New Cold War, China and the Caribbean (Palgrave Macmillan 2022). Follow him on LinkedIn and X @ScottBMacDonal1.

Dr. Alejandro Trenchi is a Research Assistant at Global Americans for the organization’s High-Level Working Group on Climate Change in the Caribbean. Follow him on LinkedIn and X @trenchiale. 

Image: Maksim Safaniuk / Shutterstock.com.