Iran

The United States has dialed down both its presence and role in a region that it has dominated for nearly a half-century.

Kitaneh Fitzpatrick is an intern for Middle Eastern history and geopolitics at the Council on Foreign Relations in New York. She is pursuing a master of arts in Near Eastern studies at New York University.  In November 2019, hundreds of Iranian intelligence reports were leaked that shed light on Tehran’s success in bolstering Iranian influence throughout the region. Syria and Iraq featured heavily in the reports and are usually the focus of international attention on Iran’s foreign influence. But the Islamic Republic’s reach extends far beyond the Middle East. Recently, Iran has turned its attention to Africa. Faced with crippling sanctions and diplomatic isolation, Iran has developed a close partnership with South Africa. South Africa has long been a cornerstone of Iran’s South-South strategy, which aims to strengthen ties with African and South American states. Strongly promoted by President Ahmadinejad, the South-South strategy intends to boost Iranian international credibility and promote trade. The Islamic Republic was one of the first countries to resume trade with South Africa following the end of apartheid, and the two countries have enjoyed strong relations ever since. Trade has been an integral element of this relationship, with Iranian officials estimating the value of Iranian Foreign Direct Investment in South Africa in 2018 at roughly $135 billion.  South Africa has proven to be an unlikely ally, calling the U.S. withdrawal from of the Iran Nuclear deal “regrettable” and publicly reaffirming its commitment to building an Iranian-South African relationship. South Africa has also advocated for Iranian interests at the UN, siding with Iran on critical issues at the UN Security Council and the International Atomic Energy Agency. South Africa’s commitment to maintaining diplomatic ties with Iran in the sanctions era has allowed the two countries to engage in joint business-tech forums, scientific cooperation, and tourism. Operating within the framework of the South Africa-Iran Joint Commission of Cooperation established in 1995, Iranian and South African foreign ministers meet frequently to discuss enhancing cooperation.  South Africa has become an important defense partner. Tehran has sought to leverage its longstanding relationship with South Africa to support Iranian naval expansion outside of the Middle East, and has conducted limited out-of-area naval operations in South Africa, according to a recent U.S. Defense Intelligence Agency report. Iran and South Africa have also signed basic military cooperation agreements, and Iran’s deputy minister of defense met with South Africa’s chief of defense force staff in Tehran this May to discuss “the development of defense cooperation [that would achieve] long term and strategic engagement.” While deepening defense ties with South Africa is important to projecting Iranian military might, Iran’s navy frequently faces maintenance issues and its deployed forces are largely symbolic. However, naval expansion to South Africa is still a powerful demonstration of Iranian political influence in spite of economic hardship and domestic unrest.  South Africa is part of Tehran’s effort to offset the cost of U.S. sanctions and increasing diplomatic isolation from the West. The relationship still has room to grow, but it and others will provide an essential lifeline to Iran and will undermine U.S. pressure.

The United States extends deadline for companies affected by Huawei ban; Bipartisan coalition of U.S. senators asks White House to appoint 5G coordinator; Russia-led UN resolution on cybercrime passes, despite U.S. opposition; Iran blacks out internet in response to nationwide demonstrations; and Chinese regulators scrutinize acquisition of China-linked company by U.S. chipmaker.

I have a rule of thumb on the oil price cycle: When commentators start using the word “never” we are typically at the brink of a cycle shift. For a while now, oil prices have been stuck in a range. That stasis has led to much commentary that prices will never go up again. The evidence that oil prices can never rise again came to traders from a simple concept: The all-time, worst imaginable event that could slay oil supply—a successful military attack on Saudi Arabia’s Abqaiq crude processing facility—came and went with only a brief upward whimper in the price of oil. Savvy oil commentator Nick Butler summed it up succinctly, “The events around Abqaiq not only confirmed the immediate strength of supply, but also highlighted the fact that the circumstances that could lead to a sustained price surge are very unlikely to happen.”  Now, complications surrounding the valuation of initial public offering (IPO) of shares in Saudi Arabia’s state oil firm Saudi Aramco are stimulating even more dire predictions about oil. A commentary in the Telegraph noted the Aramco IPO represents “a sobering moment for OPEC [the Organization of Petroleum Exporting Countries]” and adds that “The risk for OPEC and Russia is that the ‘lower for longer’ price stretches into the middle of the next decade. By then, electric vehicles will have reached purchase cost parity with petrol and diesel engines, and much lower life-time costs.” The article is one of many of late suggesting the oil industry is on borrowed time where oil prices have nowhere to go but down. No one is even mentioning the failed auction of offshore exploration blocks in Brazil per se, but it could be taken as yet another sign that oil companies are not in any way desperate for increasing reserves. Still, today’s statistics are not yet proof of the sunsetting of oil prices. World oil demand is not declining this year, compared to past years. Demand is up by 800,000 b/d in the first nine months of 2019, compared to the same period last year. This is less than expected a year ago, but still significant. The narrative that China’s oil demand is falling due to the trade war is also incorrect. Chinese oil demand was 12.7 million b/d in September, up from 12.4 million b/d in 2018. Indian oil demand has also made gains since last year, but at a more modest growth rate of 130,000 b/d. With world demand averaging only a more modest growth rate of 800,000 b/d, U.S. shale takes more than the entire pie, leaving no room for other producers who might have or want to have new oil fields coming online. The International Energy Agency is still projecting growth in global oil demand for 2020 to reach 1.2 million b/d. The optimistic forecast is despite the fact that economic headwinds have curtailed oil use growth in the Middle East and Latin America so far this year. Perhaps in conjunction with announcements about new oil production from giant oil fields in Norway and Guyana, oil traders have a healthy distrust of rosy suggestions that oil market surpluses will shrink. I tend to think of oil prices as cyclical, even if the cycle has been shortened by the U.S. shale boom and related oil price hedging. That is probably why I am finding it harder than usual to jump on the oil demise bandwagon and keep harping back to geopolitical events. But I also find a disconnect between the reality of electric cars and the current narrative that they have already transformed the market. Operating electric cars have amazingly hit the 7 million mark, up from almost nothing a few years ago, but that is out of a global car stock of 1.3 billion on the road today. China is not on a steady path to electrification, either. China has rhetorically indicated that down the road, it plans to ban internal combustion cars. However, this year, it lowered subsidies for electric cars and that has hurt sales. Even if global oil demand is, in fact, soon to be flattening out, as it has already in Europe, there continues to be a lot of dire geopolitical influences on supply instability out there to give pause.  Proxy wars are still raging in the Middle East. This week saw exchanges between Israel and Iranian proxies in Syria. Israeli security analysts are worried about the escalating situation, with one Israeli nuclear scientist suggesting in a major newspaper that the country shut down its nuclear power plant at Dimona as a precaution. Unrest in Iraq is another trigger point for regional conflict. Anti-government protesters briefly cut off roads to the port of Khor al-Zubair where oil exports are shipped and to the entrance of the large Rumailah oil field. Protesters from across sectarian and economic classes are demanding a change in government to redress Iranian influence, corruption, and the current system of political patronage. A recent New York Times and Intercept report recently exposed Iran’s vast influence in Iraq including special relationships with senior Iraqi officials. Iran is unlikely to submit and change its behavior towards Iraq easily given the extensive economic ties that bring billions of dollars in value to the Iranian economy and its ruling elite. Iraq provides Iran with food and other goods in exchange for Iranian natural gas and electricity trade. Iran relies increasingly on this relationship as its economy and people suffer under the Donald J. Trump Administration’s “maximum pressure” sanctions campaign. Iraqi protesters accused Iranian backed groups of employing snipers to put down the mass protests. Similarly deadly, mass protests are also taking place in Iran in the aftermath of the government’s announcement to reduce state subsidies for fuel. It is equally unclear what Russia’s entry into the Libyan war could mean for that country. Some analysts are suggesting that the Russian backed faction might eventually be tempted to disrupt a tenuous truce over control of oil distribution inside Libya. For now, markets seem inclined to discount unrest and war across the Middle East as a feature influencing the price of oil. I am inclined to keep warning that this could be a mistake. But then, that makes me seem like a whiner who can’t let go of an old way of thinking about Middle East conflicts. So I will satisfy myself by reminding everyone that “never” is a really long time when it comes to the price of oil. To date, never has not come to pass.

Each week between now and the Iowa caucuses, I’m talking with two experts with differing views on how the United States should handle a foreign policy challenge it faces. These special episodes are part of CFR’s Election 2020 activities, which are made possible in part by a grant from the Carnegie Corporation of New York.

Iran poses an acute threat to oil infrastructure across the Middle East, potentially allowing it to extort concessions from world powers.    

Welcome to “Women Around the World: This Week,” a series that highlights noteworthy news related to women and U.S. foreign policy. This week’s post, covering October 11 to October 24, was compiled by Yuxin Lei and Rebecca Turkington.

Huawei redeploys U.S.-linked executives and looks to other markets; U.S. cyberattacks against Iran unveiled; Russian APT involved in 2016 DNC hack still active; United States evaluates election security; and Russia says it will soon start cybersecurity cooperation with the United States.

Top Chinese AI firms added to export blacklist; Iranian hackers target 2020 campaigns; uncertain future for Libra cryptocurrency; U.S. companies confronted by Beijing’s censors on Hong Kong; and Twitter used user email addresses and phone numbers for advertising.

It has been four weeks since a major military attack on critical oil facilities in Saudi Arabia shocked the world and very little has happened to suggest such an event couldn’t happen again. That begs the question: Why are oil prices falling? If you are a politician sitting in Washington D.C., it could be tempting to explain the calm as stemming from the changed crude oil supply situation of the United States where rising crude oil production – now exceeding 12 million barrels a day – has allowed the United States to become a major crude oil exporter. Citigroup is projecting that the startup of a new Texas oil pipeline will allow U.S. crude oil exports to expand into 2020, up from the 3 million b/d recorded over the summer. That’s created the impression that rising U.S. oil production can replace any disruption from the Middle East. Unfortunately, the numbers don’t actually suggest that. Before the United States takes an energy independence victory lap, it could be wise to consider that America’s crude oil import balance isn’t all that different than it was ahead of the 1973 oil crisis. Yes, that’s right. You did not misunderstand me. I am saying we relied on the same percentage of crude oil imports in 1972 as we do today. In 1973, the United States was a crude oil importer. In 2019, the United States is a crude oil importer. The United States still has to worry about a major disruption in global oil supply. Here are the numbers: In 1972, the United States consumed an average of 16.4 million barrels a day (b/d) of oil. That same year, U.S. crude oil production was 11.2 million b/d and imports of foreign crude oil, to the tune of 5.2 million b/d represented 32 percent of U.S. consumption. By the fall of 1973, U.S. crude oil imports were about 6.2 million b/d. In July 2019 (the latest month for official U.S. government statistics), U.S. crude oil production was 11.9 million b/d, an impressive rise since 2008 when U.S. crude oil production bottomed out at 5 million b/d. Oil consumption in July 2019 was 21.1 million b/d. The deficit of 9.2 million b/d of crude oil or 43 percent of U.S. consumption is complex. That’s because U.S. shale production includes an additional 4.8 million barrels a day of natural gas liquids, some of which can be used in U.S. oil refineries. Ultimately, the United States imported about 7 million b/d of crude oil from other countries in July 2019. We exported 2.9 million b/d of U.S. light sweet crude oil from tight oil plays in Texas, Oklahoma, and other states for net crude imports of 4.2 million b/d. The net import number is about 20 percent of U.S. oil consumption, better than the 32 percent in 1973, but not enough to matter. The 7 million barrels a day of physical crude oil imports from abroad, which includes oil from Mexico and Canada, is 33 percent, roughly the same level as in 1973. The United States is, however, also a large exporter of refined products. Presumably, in an extreme war situation, the United States could limit those exports to prevent physical shortages in the United States. Saudi Arabian oil production represents about 10 percent of global oil supply. If it were substantially knocked out by a second or third military attack, it would be hard for U.S. oil producers to replace that amount of oil in a short period of time. Saudi Arabia was exporting 7.4 million b/d of crude oil prior to September 14 when a combination of cruise missiles and attack drones damaged major crude oil processing plants at Abqaiq and important facilities at the large 1.5 million b/d Khurais oil field. Expedited repairs and redundant equipment and facilities have allowed Saudi Arabia to restore export levels quickly, but a second attack would be harder to bounce back from. Spare oil production capacity is constrained and inventories are being drawn down. Moreover, other regional oil facilities in Southern Iraq, in the United Arab Emirates and in Kuwait could be vulnerable to similar attacks. By comparison, U.S. oil production grew close to 2 million b/d in 2018 and that was an amazing technical accomplishment, but it is less likely that U.S. producers could increase output by three, four, or five million b/d in short order to replace lost Saudi or Iraqi barrels. It would likely take the United States several years to achieve this larger level of increase. While U.S. tight oil production from shale could be expected to increase in three to six months following a major rise in oil prices, bottlenecks could hinder a fast response. Hiring additional work crews, purchasing drilling equipment, and other logistical obstacles could slow down the U.S. industry response initially. The time lag could leave markets more vulnerable to any major disruption of oil from the Middle East that lasts longer than a month or two. U.S. shale production grew less than 1 percent in early 2019 as operational issues plagued firms such as Concho Resources, which suffered a production setback when the company found it was placing its wells too close together. Stock values of some smaller U.S. independent oil producers have taken a beating this year, and some speculators are positioning themselves in credit swaps markets to benefit from any fall in oil prices that could worsen U.S. shale producers’ performance. Institutional investors and their hedge fund managers have seen volatile returns since 2014 when holdings in shale companies turned suddenly negative from the collapse in oil prices. As a result, easy capital to expand drilling programs in the event of an oil price rise could be harder to come by this time around. Giant U.S. independent oil producer ConocoPhillips just announced it was raising its dividend by 38 percent and buying back 5 percent of its shares in an effort to please investors. All of this should mean that oil prices should be carrying a war premium. Instead, prices are falling. Cornerstone Macro suggests in a recent note that it is possible that oil markets have “deduced from all this that the odds of a negotiated way out of strife and sanctions, and an imminent return of Iran’s supply to market” is built into oil price expectations. The macro analysts say they are “less sanguine” about that outcome. It does seem optimistic under the circumstances of escalating attacks on regional oil facilities since January 2018. Europe, Japan, and most recently Pakistan, have actively tried to defuse the conflict between Iran and Saudi Arabia. But even if a ceasefire does seem to take hold in Yemen, for example, the military leverage Iran has over major installations of its neighbors would not be alleviated unless the region saw some substantial movement towards demilitarization of weapons systems. That seems unlikely given the number of active conflicts and internal protests across the Middle East. Another explanation for falling oil prices are fears that oil demand will sink significantly in 2020 as recession grips major economies. Oil demand in the industrialized economies fell by 400,000 b/d in the first half of 2019, compared to a year earlier, including a 200,000 b/d drop compared to last year for Europe’s big five economies – Germany, France, UK, Italy and Spain. Sentiment is that continuation of the U.S.-China trade war will start to take its toll on Asian oil demand as well, though Asian oil demand is expected to average 28 million b/d this year, up from 27.1 million b/d in 2018. Global oil demand is running about 1 million b/d higher this year than 2018 levels. There could also be a simpler, structural explanation for languishing oil prices. There are fewer speculators willing to bet the price of oil up. Many of the heady oil traders known for making big bets have retired in recent years.  Also hedging by oil companies in which shale firms sell their production forward to lock in oil prices as they were rising this fall has effectively kept a lid on the market. The combination of these two market features has lessened the momentum to speculative bubbles in oil. Long-term investors also worry that oil demand will peak eventually as new oil saving technologies take hold and governments act to limit greenhouse gas emissions, and this has reduced interest in long-short commodity funds. Still, on September 14 when Saudi Arabia’s oil facilities were attacked, U.S. oil prices went up 15 percent in one day. Traders who were betting the price of oil would continue to go down had to adjust their bets and that created a large price increase. The problem with Iran has not, in fact, been resolved and markets could see a similar black swan event. Any global event will affect U.S. markets, regardless of how much oil we have at home. Oil is a global commodity and its pricing is determined by global supply and demand. Since the United States is part of the global market and imports crude oil from abroad, U.S. crude oil prices are influenced by global pricing trends. The easiest way to explain this phenomenon is to consider water in a swimming pool. If someone comes with a giant bucket and takes water out of the shallow end of the pool, the water level goes down not just in the shallow end of the pool but for the entire pool equally. By the same token, if more water is put in the pool by a water hose, the water level goes up throughout the pool and not just on the side where the hose pours in. The oil market is the same. If the oil market loses Saudi or Iranian or Iraqi oil, all oil commodity prices are affected for all users of oil, not just users of the disrupted oil. Washington pundits could be advised to keep that in mind as they consider how the United States will prepare for the volatile situation across the Middle East. 1973 could seem like a long time ago and U.S. production could be rebounding, but it is not the case that the U.S. no longer has to “care.” There are 276 million vehicles on the road in the United States of which 99 percent run on oil. We should change that, but so far, we are not moving quickly in that direction. Just saying…

Iran’s president used his UN address to dispel notions about ramped-up diplomacy with the United States or fundamental changes to Iranian actions in the Persian Gulf.

Though Trump’s tone was solemn and even-keeled, the overall thrust of his UN General Assembly speech was of transactional nationalism, emphasizing the importance of pursuing national interests and combating globalism.

If the United States is done fighting for Saudi Arabia’s oil, it's done fighting for the entire region.