U.S. could benefit from global export market by tightening blockade on Venezuela, shutting out Iran and stoking civil war in Libya
For decades, the United States government has been terrified of high oil prices. Oil shocks, like the one triggered by the 1973-74 Arab oil embargo, were disastrous for the economy, car makers and consumers. Expensive fill-ups risked voter retaliation. The first Gulf War, when coalition forces led by the United States evicted Saddam Hussein’s Iraqi army from Kuwait, was in good part an oil war.
When Donald Trump became U.S. President, he, too, decried high oil prices and launched a Twitter storm to demand that Saudi Arabia and other members of the Organization of Petroleum Exporting Countries (OPEC) pump more oil to knock prices down.
But in recent months, the lowoil policy seems to have changed, even if Mr. Trump continues to urge OPEC to pry open the spigots as oil prices climb. Brent crude, the international benchmark, has climbed more than 30 per cent, to about US$74 a barrel, since its recent low in December. In the United States, consumers are starting to feel the pain of expensive fill-ups. According to AAA, the average price for regular fuel is now US$2.88 a gallon, or 76 US cents a litre, (premium is US$3.34) up from US$2.64 a month ago.
Yet, what Mr. Trump says about oil (lower, please) and does about oil (okay, let’s push it higher) seem in blatant contradiction, as Fulbright professor Jacob Mundy has pointed out.
On Monday, the Trump administration announced it would grant no more waivers for the eight countries, including China, that import oil from Iran. The goal is to eliminate Iranian exports. “We’re going to zero,” Secretary of State Mike Pompeo declared.
At the same time, the Trump administration is tightening its blockade on Venezuela, another big OPEC producer, and stoking
the civil war in Libya by backing the attack of the eastern warlord, General Khalifa Haftar, on Tripoli, home of the UN-endorsed Government of National Accord. Libya could be on the verge of another all-out civil war that could cripple its oil production and exports.
Meanwhile, the Saudi-led war against Yemen, tolerated by the Trump administration, and the administration’s wholesale support of Israel at the expense of the Israeli-Palestinian peace effort, only raises the chances for widespread violence in the Middle East, possibly to the detriment of oil exports.
Strangling Iran and Venezuela has already tightened up the global oil markets considerably. According to OPEC’s April market report, Iran’s oil production (based on secondary sources of information) fell to 2.7 millon barrels a day (b/d) in March from 3.8 million b/d in 2017. Over the same period, Venezuela’s has gone to 732,000 b/d from 1.9 million b/d. Libya’s production increase – to 1.1 million b/d from 811,000 b/d – has not been nearly enough to offset the plummeting output in Iran and Venezuela. Iran’s production and exports will keep falling, even if they are unlikely to be eliminated, as the waivers expire. Venezuela’s could keep falling too, and Libya could go into reverse.
In theory, Saudi Arabia and the rest of the OPEC countries could take up the slack – or so the Trump administration suggests. But can it? Saudi Arabia is the main swing producer but its ability to make up for the losses of Iran and Venezuela, and potentially Libya, are an open question. Saudi Aramco, the world’s biggest oil company, delivered a shock early this month when it used a debt prospectus to reveal that its most prolific field, Ghawar, is pumping 3.8 million b/d, not the five million b/d that Aramco had claimed some years earlier.
The oil analysts at the U.S. State Department and U.S. Energy Information Administration are not morons. They must have known that taking Iran and Venezuela out of the export market would boost oil prices. They must have known that Saudi Arabia’s ability to fill that entire export hole, and possibly one left by Libya, was unknown.
And they must have known that the Saudis don’t necessarily want to boost supplies to make Mr. Trump happy, all the more so since the Saudis are keen to ramp up the value of Saudi Aramco ahead of its initial public offering, expected next year or in 2021. In a note published this week, oil markets analyst of Olivier Jakob of Switzerland’s Petromatrix said “Saudi Arabia is now in a difficult position of having an alliance with Russia to reduce oil supplies and having an alliance with the U.S. to increase supplies. You can’t have it both ways for too long.”
In other words, Mr. Trump’s calls for gushers of oil from OPEC to dampen prices doesn’t quite ring true. While he certainly doesn’t want to see US$4-a-gallon gas as he’s heading into an election, he might be entirely comfortable with high-ish prices.
A lot has changed in recent years in the global oil markets. The United States used to be the world’s biggest oil importer, and was beholden to the good graces of OPEC (and exports from the Canadian oil sands, to a lesser degree). Today, the United States is an oil powerhouse, thanks to the shale oil revolution, and has started oil exports, which were illegal under American law as recently as 2015. The International Energy Agency predicts that, by 2021, the United States will be a net exporter of oil.
Today, the United States is the world’s biggest crude oil producer, a position unimaginable only a few years ago, and Mr. Trump boasts about the era of American “energy dominance” and all the market, financial, trade and industrial power that goes with it. That power rises when oil prices rise. What was good for America was low oil prices. That’s no longer the case. Shutting Venezuela and Iran out of the export market won’t hurt America nearly as much as it would have five or 10 years ago; it might even help America.