Iran, Oil and U.S. Electoral Politics

We have supposedly entered a new world in which the United States can insulate itself from broader global energy trends. Nice try, but at best the United States has played its energy independence card a decade early. That matters for presidential elections, since both candidates are running on a U.S. energy independence ticket.

The first problem concerns the linkage between U.S. foreign policy preferences and the price of fuel at the pump. It is simply impossible to square the circle between currently cheap U.S. petroleum and the on-going Iranian sanctions pressure.

President Obama basically has two tricks up his sleeve to do this. Plan A is the hotline to Saudi Arabia to pump more oil. Plan B is keeping his finger close to the Strategic Petroleum Reserve button if things spin out of control.

Both options are problematic. And both very much highlight just how far U.S. energy independence has to go before it’s a credible policy option — and not just self-pleasing hype.

Let’s start with the implications of Plan A. Saudi Arabia has been reluctant to put more oil on the market, despite recent a G7 communique asking them to do so.

Whether the market needs additional Saudi tankers making their way across the Atlantic is debatable. But make no mistake, the fact that Saudi Arabia didn’t immediately take up the G7 request was a deliberate Saudi snub.

They are fed up of being taken for granted as a tool to cover U.S. sanctions against Iran, not to mention to keep helping the Federal Reserve to print money with endless impunity.

This is especially true when the Saudis see the prospect of “tight oil” in the United States one of the key threats to the Saudis maintaining their market share over the next decade. No one in Riyadh needs reminding of North America’s production potential over the next decade.

The ever-bullish Citigroup thinks North America could be extracting 22 million barrels per day over the next ten years. This call may win Citi new friends with energy independence-minded politicians in Washington, but the Saudis are none too pleased.

Reminding the Saudis of the coming market onslaught from the United States (assuming it materializes in full bore) isn’t such a good idea when they are supposed to keep opening the taps to help ease America through difficult presidential elections.

The Saudis have grudgingly helped take some of the steam out of the market in the past few weeks. But if it is to keep playing this moderating role in the coming weeks, it shouldn’t be taken as an operational decision ordered by the U.S. State Department.

It must be read as a significant political gesture from Riyadh, and acknowledged as such in Washington. The Saudis are well aware that, over the long run, the United States is going to kill the supply-side goose that laid OPEC’s golden egg.

“OECD days” are over

Plan B, delving into the Strategic Petroleum Reserve, is even more dangerous for President Obama. That would maintain the pretence of strong pressure on Iran, while delivering cheap prices at U.S. pumps.

Any way you look at it, this could only ever be interpreted as a geopolitical move from Washington, not a decision taken on serious economic grounds of actual or imminent supply shortages in the market.

If President Obama presses the G7 to make a collective release of oil reserves via the International Energy Agency, the collateral political damage would be even worse. Not only would such a move have uncertain price effects, the incentives for private sector players to hold storage would be significantly reduced, not to mention any global ambitions the IEA has being shot to pieces.

Most critically, it would also kill any prospects of getting China or India, as the world’s two demand growth epicenters, into the IEA. There is no way they would sign up to an institution seen to be that closely aligned to the execution of U.S. foreign policy interests.

The idea that you can continue to have a consumer energy club without these key markets involved is nonsense. The “OECD days” are over. Energy is a global game now that requires global composition if governance is to be effective.

Obviously, it is possible that recent unrest in the Middle East and North Africa could escalate after the fatal attack at the U.S. consulate in Libya to credibly bring the reserve into play. But the underlying problem isn’t going to go away over next decade.

In this emerging new world of energy abundance in the United States, America’s politicians think they have far more policy space in which to pursue their geopolitical interests.

But the U.S. energy revolution is, at best, half complete. What happens in the Persian Gulf still critically affects the Gulf of Mexico: America is still vitally connected to the global energy system with all the pressures and complexity that brings. Failure to fully grasp this fact has put the Obama Administration into all kinds of political trouble in 2012.

No matter how strong the prospect is for the United States to produce more of the oil it consumes, these constraints will probably still be in place for new presidential administrations in 2016 and 2020.

The bottom line is that the U.S. government has overplayed its energy independence hand at a time when global supply side dynamics are remarkably fragile. America has literally created two totally divorced narratives of a world of global abundance versus global scarcity.

Given President Obama’s electoral Plan A (reliance on the Saudis) and default Plan B (IEA release of strategic reserves), to paper over the cracks it’s not hard to work out which end of the oil price spectrum we are still at.

What really needs to happen is for the “dream” of American energy independence to realign with the global realities of limited OPEC supply. OPEC is struggling to nudge global production anywhere near 100 million barrels per day.

Until these two worlds find some of common ground, the United States is going to learn the hard way that tight oil markets still affect the geo-economic, geopolitical and strategic issues of world, irrespective of how much oil the United States thinks it can ultimately pump.