Saudi Arabia

The premium appears to be creeping back into international oil prices as markets wait to see who will be policing the sea lanes in the aftermath of a Saudi announcement that it would temporarily halt oil shipments via the Bab el-Mandeb Strait. The Saudi announcement came after two of its oil-laden tankers were attacked by Yemeni Houthi militias. Shipments in the Bab el-Mandeb Strait, which connects the Red Sea and Suez Canal with the Persian Gulf and Indian Ocean via the Gulf of Aden, is a major sea route for oil shipments of close to five million barrels a day (b/d) of crude oil and petroleum products in both directions, including 2.8 million b/d flowing from the Mideast to Europe. Refined products from Saudi Arabia’s Yanbu refinery on the Red Sea are frequently exported south through the Bab el-Mandeb Strait to Asia. The Strait can be bypassed for northern traffic by sending ships on a longer, more expensive route around the southern tip of Africa.  Yemeni rebel attacks on shipping in the Bab el-Mandeb Strait are not a new occurrence but take on new importance in light of the U.S. withdrawal from the Iran nuclear deal (JCPOA) and subsequent planned reimposition of sanctions against Iranian oil sales. Iran has threatened that the United States would be mistaken if it thinks Iran would be the “only” country unable to export its oil. Iran explicitly mentioned its ability to close the Strait of Hormuz through which over eighteen to nineteen million b/d of Mideast crude oil transits. The United States has the capability to reopen any blockage of the Strait by military means and provided minesweepers and military shipping escorts to reflagged Kuwaiti oil tankers in the 1980s during the eight year Iraq-Iran war.  Saudi news outlets have run headlines in recent days that the United States was “weighing” its military options to keep the sea lanes open. The headlines, also published in Israeli newspapers, are referring to a statement made by U.S. Defense Secretary James Mattis who told Pentagon reporters on July 27 in discussing Iran’s threats to a different waterway chokepoint, the Strait of Hormuz, “They’ve (Iran) done that in years past; they saw the international community put dozens of nations’ naval forces in for exercises to clear the strait…Clearly this (closure) would be an attack on international shipping and could have an international response to reopen the shipping lanes…because the world’s economy depends on those energy supplies flowing out of there.” Mattis called upon Iran to abide by international rules.  Analysts say the U.S. withdrawal from the JCPOA has strengthened unity and coherence of the various factions within the Iranian government, moving Iranian President Hassan Rouhani to the right. Thinking about succession down the road for aging Supreme leader Ayatollah Ali Khamenei is influencing how the current line-up of political and religious leaders inside Iran are responding to the country’s current problems, Iran watchers say.  Still, in private briefings, Iranian officials are throwing around the term “strategic patience” as a guide to current thinking and noting that Iran has weathered sanctions for decades and will take no drastic measures against the United States or its regional allies. The argument goes that Tehran can afford to wait out the Trump administration, which will face a new election in 2020, and that Iran’s priority in the interim should be to avoid direct military clashes with the United States—which it believes U.S. allies Saudi Arabia and Israel would like to provoke. That raises the question regarding how much control Tehran has over its many armed proxies in Iraq, Yemen, Syria, and Lebanon. The relative independence of such proxies increases the risk of unintended or inadvertent clashes across a range of flash points, complicating U.S. responses.  In the intervening years since the Iraq-Iran war, several Arab oil exporters have built oil pipeline bypass routes so that a portion of their crude oil exports could avoid the Strait of Hormuz. Saudi Arabia’s Petroline, which can carry five million b/d of Saudi crude oil from eastern fields to an export facility on the Red Sea, is being expanded to carry seven million b/d by year end. Use of drag reduction agents can augment flows by as much as 65 percent. Abu Dhabi also has a 1.5 million b/d crude oil pipeline from Habshan to Fujairah that bypasses the Strait. Oman is building an oil storage hub at Duqm, and several Gulf Arab producers keep floating oil storage in tankers off the coast of Fujairah. Industry estimates are that Saudi Arabia also has over seventy million barrels in operational and strategic storage in Asia and Europe, among other locations.  Saudi leaders have been hoping that a military victory at Yemen’s port of Hodeidah might pave the way for intervention by the United Nations, progress on diplomatic negotiations, and by extension, a reduction in the risk to shipping in the Red Sea. So far, this goal has not been reached; hence, headlines in official news outlets about the U.S. role in the sea lanes.  President Donald Trump has actively tweeted about oil prices in recent weeks including a tweet that specifically mentioned how the United States protects regional countries. More recently, Presidential tweets have included warnings to Iran not to “threaten the United States.” The United States plays a critical role defending the global sea lanes and ensuring the free flow of oil around the world. Yemeni attacks on Saudi shipping make it harder for oil prices to recede, and saber rattling between Iran and the United States is on the rise as the November oil sanctions deadline approaches. This geopolitical backdrop is currently keeping oil markets on edge, despite increases in supply.  As U.S. midterm elections approach, high oil prices might not be the only factor that enters voters’ minds as they prepare to vote. The American public is weary of costly military engagement across the Middle East and could wonder why the United States is so unable to extricate itself from its role defending Middle East oil shipments, especially in light of rising U.S. domestic oil and gas production. Less than 10 percent of U.S. oil imports came from Saudi Arabia in 2017, with an additional 600,000 b/d originating from Iraq. But, Saudi Arabia remains a major oil supplier globally and most of the world’s spare oil production/export capacity sits in Saudi Arabia, Kuwait, and the United Arab Emirates. That means any disruption of oil supplies in the Persian Gulf would be a major threat to the global economy and would hurt U.S. trading partners, thereby damaging the U.S. economy as well even if the United States could more easily replace its limited Saudi and Iraqi oil imports. Hence, U.S. oil and gas production and exports have not reduced the U.S. need to police the free flow of oil from the Middle East. Oil commodity prices are also set globally which means like a swimming pool, where taking out water in one end of the pool affects the water level across the entire structure, an oil price rise due to the loss of supply in one part of the world is reflected in U.S. price levels as well all other locations across the globe. Rising oil prices still put U.S. consumers and important industries like the automotive sector under pressure, even if they are less negative for the overall U.S. economy. Ironically, the more successful the United States is in convincing the major economies to shun Iranian crude oil purchases, the more it could need to talk to the very same countries about sharing the financial or military burden of defending the sea lanes for oil flows from the Middle East. Without taking such action, it will be hard to convince Iran or its proxies that it is counterproductive to escalate threats to international shipping. Although the United States has appeared to shun international cooperation of late, continuing to maintain a very broad the coalition of European and Asian countries in sea lane navigation matters could discourage risky brinksmanship activities by all parties that could benefit from a direct confrontation between the United States and Iran.      

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 June 24 to June 29, was compiled with support from Lucia Petty.

The Gulf nation’s ground troops have cultivated alliances in Yemen with local armed groups, but its ability to shape the civil war’s outcome is limited.

As energy ministers from major oil producing countries gather in Vienna this week to discuss the stability of global oil markets, the variables that will dictate outcomes have rapidly shifted. Pre-meeting narratives that previously focused on the appropriate level of external private investment—either too much, in the case of U.S. shale producers, or too little, in the case of private sector international oil companies—look woefully inadequate to explain current oil market conditions. Instead, how to deal with the accelerating political and institutional breakdown of several national oil companies across multiple continents now stands out as a pressing structural challenge for the Organization of Petroleum Exporting Countries (OPEC) and U.S. policymakers alike. I highlighted this problem vis a vis Venezuela last March. Stated intentions to replace lost barrels from Venezuela and potentially Iran has brought acrimony back into the OPEC fray. U.S. plans to sanction Iran’s oil exports are the most recent publicly visible geopolitical irritant, but the history has shown that eliminating the endogenous geopolitical swings in the oil cycle takes more intervention and planning capability than even the most well intended partnerships can master, much less nation states whose relations have been punctuated by direct military threats or proxy wars. Talk of a sustained Saudi-Russian alliance that would be effective in eliminating the factors that could cause gyrations in oil prices seem overstated. All of OPEC’s fourteen members have flagship national oil companies (NOCs), that is, state-controlled entities that oversee their nation’s energy industry. Other important oil producing countries such as Brazil, Mexico, and Russia also have NOCs that dominate their oil and gas sectors. Many of these national firms are facing structural budgetary, corruption, or other internal political challenges, including attacks on facilities by local rebel groups, criminal gangs, terrorists, cyber hackers, and/or armed combatants in ongoing military conflicts.   As a result of these ongoing NOC difficulties, supplies from several OPEC countries, Venezuela, Libya, Iraq, Iran, Nigeria, and Angola have been volatile in recent years. In particular, the collapse of Venezuela’s oil industry and a slide in deep water oil production from Angola have been more instrumental to the market success of OPEC’s agreement with Russia and other non-OPEC oil producers than the producer group’s “planned” cuts in reducing excess inventories by almost 200 million barrels since early 2017 and pushing Brent oil prices up from about $55 to $75 a barrel. Cornerstone Macro noted in a recent report that oil stocks in industrialized countries experienced a counter seasonal decline of three million barrels in April, as compared to the more customary twenty million buildup on the heels of reduced global supplies and more robust than expected U.S. and global economic growth. While Saudi Arabia, Kuwait, the United Arab Emirates, and Russia did make promised output reductions to help tighten oil supply over the course of 2017, unintended production declines continue to be more material. Not only did oil output declines from Venezuela, Algeria, Angola, Ecuador, and Gabon amount to losses of close to one million barrels a day since early 2017, according to Citibank, markets have come to expect accidental supply disruptions from conflict prone oil regions in Libya and Nigeria. That reality prompted one prominent energy columnist to conclude that OPEC has become “an increasingly unreliable supplier of an essential commodity.” Whatever the outcome of the OPEC-non-OPEC Vienna group’s deliberations this week, it could turn out to be only a temporary fix to this more structural NOC problem than generally understood. Right now, OPEC spare productive capacity is highly limited. Saudi Arabia and Russia together would probably have difficulty adding much more than 1.5 million barrels a day to markets through the end of the year. Ongoing problems in Libya and Venezuela, combined with renewed sanctions on Iran, could possibly take more than that off the market. And what if a new supply problem emerges? Saudi Arabia and Russia are discussing longer run cooperation. What would that look like in a world where uncertainty plagues many national oil companies around the world, including, perhaps, their own firms? Does budget-constrained Saudi Arabia agree to divert billions in tandem with Russian firms to expand additional oil fields’ productive capacity down the road to capture future market share that could be available as NOCs in other countries continue to fail? If Saudi and Russia make capacity expansion pushes, what becomes of OPEC as a coherent organization? Will the Vienna group need to shrink in number? Conversely, if Saudi Arabia and Russia choose to make only a quick stop-gap measure just to keep markets from overheating in the next few months and don’t invest in new capacity, will they sacrifice future revenues to private oil and gas investors who can bring on capacity more quickly if NOC capacity continues to falter? The 2014-2015 price collapse has proven that a year or two of low prices won’t be sufficient to knock out growth in U.S. tight oil. That means restarting a price war in the short run isn’t an ideal option for OPEC, especially if those flooding the market do not appear to be able to survive the prolonged revenue drop that would make a price war option an effective threat. And my guess is that low oil prices also aren’t likely to be sufficient to knock out capital investment by the major international oil companies (IOCs). Those companies have started to pivot their strategies to direct their capital spending to activities that will be more productive than those pursued over the last decade when booking new large reserves was the priority. Rather, companies are focused on spending programs that can bring higher production more quickly, such as directing capital spending to shorter cycle field extensions and satellite field developments that can bring first oil into the market rapidly within one to three years (as opposed to mega-projects that took near a decade to develop). Companies are also developing new techniques to reduce the cycle time and costs on challenging green field projects.  Moreover, innovation in the private oil and gas sector is increasingly de-risking the landscape for future oil and gas investment for private investors. As technology improves, companies are going to be able to squeeze more barrels out of all kinds of existing known in place source rock, not just oil and gas from shale formations. The most recent example is the Austin Chalk where U.S. companies are rushing to test new drilling techniques to positive results.   There’s an additional rub. Saudi and Russian efforts could have trouble influencing intermediate oil demand trends. Even if the Vienna group takes production increase decisions this week that staves off any economically crippling oil price shock that could have sent oil demand into a tailspin, caution signs are already emerging that oil prices even at $70 a barrel are creating some economic headwinds. Markets are already nervous about trade wars. Reports are emerging that high fuel prices are hindering economies within the Euro zone and elsewhere. Rising fuel prices are visibly creating economic and political problems in India and other developing economies. And the United States needs strong demand growth elsewhere to manage its own economic issues. In the case of an unexpected global economic slowdown, OPEC supply disruptions could take a back seat again to “lower for longer” story lines about failing oil demand (potentially in the midst of rising U.S. production in 2019), which could make any discussion of a more permanent, workable Saudi-Russia oil alliance even harder to envision.

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 May 19 to May 25, was compiled with support from Alexandra Bro, Rebecca Hughes and Rebecca Turkington.

Geopolitical risk is always a major feature of global oil and gas markets, but the interplay of wars without end, powerful non-state actors, and the proliferation of new weapons technologies across the globe is raising that risk. Energy Realpolitik sits down with Council on Foreign Relations (CFR) National Intelligence Fellow Michael Dempsey to discuss a host of risks that might impact the energy sector in the coming years. Topics are drawn from recent discussions by CFR fellows at Columbia University's Center for Global Energy Policy.  What are some broad trends that could influence the energy sector’s outlook in the next few years?       Mike Dempsey: First, it’s clear that the underlying conditions that brought us the Arab Spring in 2011 have not been resolved.   Just consider, according to the most recent Arab youth survey, youth unemployment remains at around 30 percent in the Middle East, and countries in this region by 2025 are projected to have a population of nearly 60 million between the ages of 15-24.    That’s a sizeable slice of the region’s population, and one-third of them are likely staring at long-term unemployment, especially if regional growth rates stay mired in the 1 to 3 percent range.       The young are not only restive, they are connected. So, during Iran’s protests in January, Iranians used forty-eight million iPhones to spread the word, and the protests spread to more than eighty cities across the country.  In 2009, estimates are that 15 percent of Iran’s population had iPhones; today it’s about half.   Just ask yourself, would we have imagined last December that protests in countries as diverse as Tunisia and Iran would be sparked by many of the same underlying conditions?    That’s not, of course, to say that there aren’t some positive trends in the Middle East (the increasing influence of women, a renewed focus on education and technology, etc.) but the negative trends are still dominant, in my view, and are likely to trigger rapid, unexpected crises in the future of the sort that we’ve experienced in recent years.   Second, a more serious debate is underway in the Middle East and beyond about the future of Political Islam. This issue is obviously being discussed in Saudi Arabia—with some encouraging signs, but also concerns—and is playing out in different ways in Egypt, Iran, and across the globe from parts of Africa to Indonesia, Malaysia and beyond. How this debate is resolved will obviously have profound implications for future political stability.   Third, if evolving economic and religious trends are shaping global stability, so too is technology. I won’t go into detail on all of the widely recognized positives that flow from recent advances in technology—energy experts certainly know the effects on the sector better than I do—but there are emerging risks that also have to be considered.  Recall on the security front: a decade ago, the U.S. military was the only country operating armed drones over Iran and Syria. Today, there are more than a dozen countries and non-state actors such as ISIS and Hezbollah that are doing so.  In fact, during the U.S.-backed coalition advances on both Raqqa and Mosul, ISIS used armed drones against U.S. forces.         And consider press accounts concerning armed drones being used in Syria only three months ago.   During the evening of January 5 and into the next day, the Russian military reportedly faced two separate swarm attacks using miniature drones against two of its bases. In total, thirteen drones were used by the attackers, each carrying ten bomblets; ten drones targeted the Russian airbase in Latakia, three the Russian naval base in Tartus.   According to press accounts, the drones each carried an explosive charge weighing about one pound, and included strings of metal ball bearings that were intended to harm individuals in the open. There are reports that several Russian fighter jets were damaged on the ground, though Moscow denies this.    Most of the individual components in the drones, including the motors, are commercially available. The drones used an onboard GPS system for navigation, but again, this technology is easily available for purchase online.   So, is it really hard to imagine in the next few years that similar attacks will be launched at other bases or sensitive oil infrastructure facilities around the world?   And here is the final kicker to the Russian story. To this day, it’s impossible based on open source information to determine who conducted the attack. So, how attractive could this type of plausibly deniable operation be to terrorists or even criminal elements in the future?   One final word on drones, if you’ve ever seen drone races you’ll know that the tiny drones used fly at great speeds—more than 150 mph—and with incredible maneuverability. That type of speed and maneuverability already poses a clear and present threat to those charged with protecting important government and commercial facilities.   And while we are discussing security threats, consider that in Yemen, as many of you are well aware, the Houthis within just the past few months have struck a Saudi tanker in the Bab-al-Mandeb Strait and fired drones and missiles of increasing accuracy and range into Saudi Arabia, producing the first casualty in Riyadh.   So, how different would the global energy outlook be tomorrow if a barrage of Houthi missiles hits Riyadh?  Would that not trigger a broader regional conflict?   Or how about if Houthi missiles penetrate Saudi air defenses and strike Aramco?       I don’t mention these threats because I think they will happen, but I, unfortunately, absolutely believe they could.   I could go on about other threats, including cyber intrusions and the long-term threat posed by autonomous weapons, but here is the bottom line: technology is going to make working in the energy sector in the future much easier, but also, in some ways, perhaps much harder.    Fourth, while I am always worried about sudden country-specific crises that could influence the energy market, I’m frankly also concerned about a growing number of transnational challenges and their potential to trigger broader instability. Some of these challenges include the rapid spread of preventable diseases, as well as today’s unprecedented human displacement crisis.   Today, more than sixty-seven million people (or one of every 110 or so humans on the planet) is a displaced person, which is fueling instability in countries from the Middle East to Western Europe. I fear we are losing entire generations of young people in countries such as Syria, and the long-term effects on regional and international stability will be profound.    This trend is especially worrisome because it’s largely owing to the international community’s inability to end the conflicts that are driving instability and displacement—witness our seventeenth year of conflict in Afghanistan, seventh in Syria, and fourth in Yemen.   So, conflicts and threats that should be preventable or bounded, now seem to grind along into deeper crises with pernicious effects that we often don’t recognize until it’s too late. Just recall how the flow of people fleeing violence in Afghanistan, Libya, and Syria have affected Western Europe’s political landscape.    This challenge is made even more difficult by the inward turn of Western states. In my view, this is an especially problematic time for the West to retreat from the world stage and to turn its focus inward.  A fifth trend that will certainly affect the energy sector surrounds issues of transparency and corruption.   The push for greater transparency around the globe is a hugely positive development, in my view, that could eventually increase business and government efficiency, improve governance at many levels, and deepen public confidence in both government and business. As you know, the pernicious effects of corruption are well documented. For example, the IMF estimates that the cost of bribery alone (one subset of corruption) costs between $1.5 and $2 trillion a year, equal to about 2 percent of global GDP.   This cost has been evident in many countries for some time. Venezuela is a good example of this, where PDVSA has been raided for years both to pay for government expenses and as a patronage cash cow, all while the company’s infrastructure was neglected. Indeed, the fight against corruption is now a first-tier issue in countries of significant importance to global energy markets, from Brazil to Mexico and from Nigeria to India.    In the short-term, the anti-corruption fight could generate increasing political instability, but if it eventually leads to more transparent and better governance in these countries, I’m certain that it will invariably help their economic performance in general, and the energy sector in particular.      So, in my view, these are five critical trends that will influence the world’s energy market in the coming years.   Are there any current developments that you are following that could influence energy prices in the near-term?    MD: Sure. These include the outlook for the Iran nuclear deal after May 12, the prospects for the upcoming U.S.-North Korea Presidential Summit, Libya’s lack of progress toward political reconciliation and the recent terrorist activity against the country’s energy industry, and the ongoing negotiations concerning the global trade agenda, especially the near-term outlook for NAFTA.   How do you then view geo-strategic trends and the likely effects on global energy prices over the next year or two?   MD: I’d say the geo-strategic backdrop for the near-term leans heavily toward increased risk, with the potential for worrisome surprises—and potential oil flow disruptions—across a range of countries including Iran, Libya, Nigeria, Venezuela, and Saudi Arabia. But I hope I’m wrong!  Do you have any final advice/tips for energy analysts or those tracking the industry?  MD: Yes. In my view, the international environment is quite fraught at the moment, which means it would be a good time to:  Routinely challenge your underlying assumption about the energy market. There are enough gathering threats (from simmering regional conflicts that have the potential to spike on short notice to asymmetric threats such as cyber and other non-traditional weapons) that this isn’t a good time for analytic complacency.  Think deeply about the quality of leadership and governance in the countries you’re following. It’s always amazing, after the fact, to examine how signals were missed and how seemingly stable countries (and companies) can experience unexpected periods of profound turmoil. As a useful exercise in humility, for example, it’s worth going back and reviewing the leading investment banks’ economic forecasts in 2006-2007, right on the eve of the Great Recession. In both the intelligence and business sectors, then, it’s worth remembering that it’s easy to develop analytic blind spots, fall victim to straight-line analysis, discount worrisome alternative scenarios, and underestimate critical drivers of change.    Along these lines, I really would encourage everyone to look hard at physical and data security issues and to constantly re-evaluate how they are postured against the next generation of challenges.   And finally, I would urge folks to think broadly and systemically about the issue of risk. Is protecting one particular company good enough today? Or do industry leaders need to cooperate more in protecting the whole system they operate in? For example, if a cyber attack cripples one energy company, isn’t it possible that attackers will learn from that experience and attack others, and that the public’s confidence will be undermined in all parts of the industry?  The issues we face today are less about competitive advantage than about preventing systemic risk or failure. 

During his visit to the United States, Saudi Crown Prince Mohammed bin Salman inopportunely noted in an interview with Reuters news service that Saudi Arabia was “working on moving from a model agreement [for oil collaboration with Russia] for a year to a longer term—10-20 years.” In fairness to the Saudi leader, he could have imagined that the oil market stability implied by a long lasting oil deal with Moscow would be welcome news to the White House, whose energy dominance policy (and many U.S. jobs) depends on the economic success of the American shale boom. After all, the goal of a permanent oil alliance with Russia would be to eliminate the costly boom and bust cycle in oil that both destabilizes Saudi Arabia and underpins the historical cycle of global financial crises.  But last week when the details of what continued OPEC-Russian cooperation on oil could look like emerged, that is, oil prices nearing $80 a barrel or even $100, President Trump took to Twitter to make clear his view. “Looks like OPEC is at it again…” the President tweeted. “Oil prices are artificially Very High! No good and will not be accepted!”  Significantly, the President’s tweet did not come in the immediate aftermath of the Crown Prince’s interview with Reuters on decadal oil agreements with Russia or even after private indications of the Crown Prince’s hope that oil prices would rise to $80 a barrel to help along his initial public offering (IPO) of Saudi Aramco. The backdrop to the President’s first tweet about OPEC came as OPEC and non-OPEC ministers began their scheduled meeting in Jeddah amid overly ambitious statements about lofty oil price goals. Saudi oil minister Khalid al-Falih, in particular, galled some long time oil commentators by declaring, “I haven’t seen any impact on demand with current prices,” and added for emphasis that the world has more “capacity” for higher oil prices given declines in the energy intensity of global economic growth. The minister’s comment echoed similar Saudi statements made in 2006 just before the economically crippling rise in oil prices to $147 a barrel. Highly respected Bloomberg oil strategist Julian Lee's article with a chart showing that history was tweeted out with the apt twitter caption: “Down in Saudi Amnesia, They’re partying like it’s 2008.”  As often with President Trump’s tweeting, it has put forth a firestorm of commentary reading between the lines. Let’s break such speculation down, idea by idea. First is the issue that the White House was probably working on the assumption that his U.S. tour had convinced the Crown Prince to delay his IPO plan. The IPO has been an albatross around the neck of Saudi oil policy, which the White House might think needs greater maneuverability. That’s on top of the fact that $100 oil isn’t a solution to the problem of marketing 5 percent of the Saudi state oil firm. Markets would certainly not believe $100 was sustainable, even if that price could be reached again briefly. Such high prices even worry the U.S. shale industry. “We are going to lose demand. It’s going to move more toward alternative energy,” was how Scott Sheffield, chairman of the board of shale powerhouse Pioneer Natural Resources characterized $70 or $80 oil in response to a question from the moderator of an energy conference panel last Thursday.  Secondly, in constructing his OPEC tweet, the President could have been thinking about the important series of decisions that are on the U.S. president’s agenda for May, any one of which could affect oil markets. Most important, the United States is due in May to decide whether to take steps that would effectively re-impose oil sanctions against Iran. Historically, the Saudis have strategically increased oil production ahead of U.S. undertakings that might be a risk to oil market stability. Notably, they offered that courtesy to President Obama back when stronger sanctions were being mooted on Iran to pressure Tehran to accept negotiations towards a nuclear deal. Washington is also considering additional punitive measures against Venezuelan leader Nicolas Maduro, who has dismantled democracy and fostered a domestic humanitarian crisis through failed economic policies. Saudi Arabia has been mum on increasing production, should Venezuela's oil production problems get worse. If President Trump typed in his tweet just after his morning intelligence briefing, he could also have been thinking about the lack of wisdom for Saudi Arabia to be tightening the global oil market against the backdrop of the escalating Saudi military campaign against Iranian backed, Yemeni militias, which has increasingly put regional oil and gas facilities and trade routes at risk to asymmetric warfare. Saudi defenses recently foiled a Houthi drone that threatened the Saudi oil refinery at Jizan.  But there is no question that President Trump is aware that important U.S. geopolitical decisions that could affect oil prices are coming in the month of May, the kickoff to the U.S. summer driving season. The anti-OPEC tweet was presumably popular with the President’s base who care deeply about gasoline prices. That begs the question: Would a return to relatively high oil prices still hurt the U.S. economy? The answer is yes, but like many things, it’s complicated.  Energy economist James Hamilton, who is among the most cited academics on the subject of oil price shocks and the U.S. economy, noted in a pivotal 2009 paper that the high oil prices of 2007-2008 had significant effects on overall consumption spending and especially on purchases of domestic automobiles. With Detroit increasingly offering U.S. consumers high profit margin, gas-guzzling SUVs, high oil prices could be problematical for American car makers. Hamilton concluded that the 2007-2008 period of high oil prices can be added to “the list of recessions to which oil prices appear to have made a material contribution.” Along similar lines, economists at Deutsche Bank are forecasting that higher gasoline prices would erode the financial benefits low-income households gained from the tax cuts.  The other problem with rising oil prices is that they can create a deterioration in consumer sentiment, by signaling the possibility of economic slowdown or crisis. Research shows that there is a significant negative correlation between gasoline price increases and perceptions of individual well-being in the United States. With U.S. mid-term elections around the corner, Republicans could find it tougher to sell the President’s economic agenda in a sharply rising gasoline price environment.  Economic research from the U.S. Federal Reserve shows a more nuanced picture for oil prices in recent years, as the shale boom has been found as a driver to increased employment across many regions of the United States (Decker, McCollum, Upton Jr.) Fed economists have also touted improving energy efficiency and better monetary policy as an important factor that will inhibit negative economic effects from rising oil prices. But so far, the recent oil price rise has been gradual and has yet to hit tipping point levels that have, in past times affected consumer driving behavior.   If OPEC doesn’t heed the U.S. President’s call for more moderate intervention in oil markets, President Trump has several policy options at his disposal that go beyond twitter. The U.S. administration could opt to “loan” heavy oil from the U.S. Strategic Petroleum Reserve to specific U.S. refiners to protect them from any loss of supply from the deteriorating situation in Venezuela or the imposition of sanctions. Such a policy could be beneficial in two ways, by at least temporarily shielding American consumers from worsening supply problems in Venezuela and by replacing at the margin a similar quality of oil that has not been forthcoming from Saudi Arabia. It would also give the president political gains as being proactive on the domestic gasoline front, something several of his predecessors have done in similar circumstances.  More controversially, President Trump could choose to accommodate French President Emmanuel Macron by delaying a decision on Iran beyond May, waiting instead for the next decision juncture, which will come in July. Such a decision could be justified as giving European allies time to try to “fix” the Iran deal, before a final decision is taken whether to scupper it. That would also give the administration time to test whether it could press for a political fix to de-escalate the conflict in Yemen, leaving open a possible incentive for Tehran for cooperating. But any broader Mideast negotiation will invite Russian interference, which will be hard to counter without some assistance from U.S. Gulf allies who might leverage their close relations with Moscow on oil – hence yet another reason that President Trump’s tweet was strategically well-timed.         

U.S. Secretary of State nominee Mike Pompeo said yesterday at his Senate confirmation hearings that he would actively try to “fix” the Iran deal, working with U.S. allies to “achieve a better outcome and a better deal.” The oil market didn’t appear to believe he would succeed. While Pompeo was laying out his views, Brent prices topped $72 a barrel amid reports that there had been an unsuccessful drone strike on Saudi Aramco’s Jizan refinery in southwest Saudi Arabia. The foiled drone attack by Yemeni Houthi rebels was unnerving for two oil-related reasons. Firstly, it was yet another indication that the proxy war between Saudi Arabia and Iran in the region was both escalating and continuing to target oil related facilities. Secondly, and perhaps even more disturbingly, it was a sign that “asymmetric warfare” posed a greater threat to oil than could have been previously understood. Increasingly, there has been evidence that sub-national groups can build make-shift drones that can deliver payloads into hard to reach targets. The Jizan refinery attack was the first time a makeshift drone attack has been widely reported to have targeted an oil facility. The drone onslaught follows a serious cyber breach that has plagued a commercial safety system used in oil refineries. Both means of warfare pose serious risks not only to the Saudi oil industry but to Western and other regional facilities as well, upping the ante on a host of conflicts that involve Iran.  The United States is due in May to decide whether to take steps that would effectively re-impose oil sanctions against Iran. During his visit to Washington, Saudi Crown Prince Mohammed bin Salman lobbied the Trump administration to reopen the Iranian nuclear deal and pressure Iran for better terms that would ensure Iran never obtains nuclear weapons, rather than the publicly announced terms which reduces the number of Iran’s centrifuges and limits the level of uranium enrichment to 3.67 percent, far below weapons grade, for fifteen years. Under the nuclear deal, Iran is tasked to remove the core of its heavy-water reactor at Arak, capable of producing spent fuel that can yield plutonium.  Last month, European leaders were sounding out the possibility that fresh sanctions be imposed on Iran aimed to moderate the country’s ballistic missile program and its role in regional conflicts in a manner they hope would maintain the Iran nuclear deal. Saudi Arabia is likely to oppose that approach. The Saudi diplomatic message regarding the Iran deal could put the kingdom under pressure to offer to replace Iranian oil that would be lost to buyers, should a re-imposition of oil sanctions against Iran become necessary. Saudi Arabia has failed to act to replace declining Venezuelan oil production, as it could have done in past decades, preferring rather to replenish depleting financial resources by tapping higher oil prices. That has led to divisions within the Organization of Petroleum Exporting Countries (OPEC) on what could constitute too high an oil price that would begin to harm oil demand.  Rather than talk publicly about replacing any “sanctioned” barrels, Saudi Arabia has been pushing a plan to have “decadal” cooperation with Russia regarding oil prices. Saudi leaders would like to structure a long lasting agreement that could eliminate the debilitating cyclical swings in oil prices. But it remains unclear how that would be accomplished, short of coordinating investment rates for most of global oil production capital spending, as was tried (also relatively unsuccessfully) by the Seven Sister oil companies back in the post-World War II era. One alternative suggestion, said to be a non-starter among fellow OPEC members, would be to return to the fixed oil price system of the 1970s. That system was undermined when OPEC members were forced to cheat behind each other’s backs using non-transparent, complex price discounting schemes such as barter deals, secretive tanker freight discounts, and extended credit terms to ensure their oil wasn’t replaced by sales by producers offering spot market related pricing.  The appointment of more hawkish foreign policy members to the Trump administration's national security team has already affected Tehran, which has had increased difficulty marketing its oil in recent weeks and is now offering additional discounts to sway buyers who are worried about the effects of future sanctions policy. European companies are considering contingency plans, and Japan reportedly curtailed its oil imports from Iran in March. Some loss of Iranian volume is probably built in to current price levels, but the geopolitical ramifications of escalating conflicts could create more uncertainty in oil markets.  At this particular juncture, from the U.S. point of view, the oil aspect of Iranian sanctions policy could be more tangential compared to concerns about Iran’s role in the various Mideast regional conflicts. The United States has tried to counsel Saudi Arabia to find a way to deescalate the conflict in Yemen but so far, little progress has been made. The United States also would like to fashion a Syria strategy that limits Iran’s role in the Levant. One lever in that process is that neither Russia, Turkey, or Iran are in a financial position to pay for Syria’s reconstruction, creating a possible starting point to assert influence by the United States and its allies. Commentator Hassan al-Hassan argues that now is the ideal time for the United States to make a strong response to test whether the current facts on the ground render President Bashar al-Assad as suddenly more dispensable to his own supporters. He suggests whatever actions the United States takes be designed to force parties to abandon the military option. U.S. sanctions moves that recently cratered $12 billion in the wealth of Kremlin insiders and hampered their ability to work with large commodity traders were a step in the right direction.    

As the White House hosts Saudi Crown Prince Mohammed bin Salman today, policy makers need to be reminded that any new arms sales across the Middle East could become part of a repeating pernicious cycle that could lay the seeds to the next big oil crisis. That’s an important conclusion of my new economics and policy paper published today with co-author Rice economics professor Mahmoud El-Gamal in the academic journal Economics of Energy and Environmental Policy (EEEP). Bin Salman kicked off the preliminary public relations for his current trip with an important and serious interview aired on the American TV news magazine 60 Minutes, in which he noted “Saudi Arabia doesn’t want to own a nuclear bomb. But without a doubt, if Iran develops a nuclear bomb, we will follow suit as soon as possible.” While Saudi Arabia and the United States share a common view that Iran is a destabilizing force the region, the United States has been resistant to Saudi lobbying that standards for a U.S.-Saudi nuclear deal should not ban enrichment of uranium. Westinghouse and a consortium of U.S. companies are discussing a bid for the multi-billion tender to build civilian nuclear reactors in the kingdom in competition with China. Coincidentally, the U.S. Department of Energy (DOE) tweeted today that the United States needs to “modernize our nuclear weapons arsenal, continue to address the environmental legacy that the Cold War programs, further advance domestic energy production, better protect our energy infrastructure, and accelerate our exascale computing capacity,” noting that nuclear deterrence is a core part of the DOE mission.” In our EEEP article, we argue that geopolitical events that are often considered exogenous to the debt-driven financial boom and bust global economic cycle are part of an endogenous and self-perpetuating meta-cycle, linked by high petrodollar recycling during periods of high oil prices that typically accompany high economic growth periods, like the one seen in the early 2010s. Petrodollar recycling takes many forms, including rising military spending and buildups. El-Gamal offers a theoretical model that explains why an oil exporting country could be “incentivized” to time its military activism during periods of oil price slumps, with the coincident effect of boosting national revenues, thus converting military capital into civilian capital. A significant part of Arab countries’ military equipment (and Russia’s) used in recent conflicts was accumulated during oil boom years following the Iraqi invasion (2003-2007) and during the Arab Spring uprising (2011-2013). Last year escalations in conflict across the Middle East from Yemen to Northern Iraq helped raise the price of oil on the heels of the major down cycle of 2014-2015. The paper using discrete wavelet analysis of oil production at the country level to demonstrate that military conflicts that destroy production installations or disrupt oil transportation networks are the “most significant antecedents of sustained long term disruptions in oil supply.” The paper recommends that “rather than increase arms sales as rentier states seek to externalize their problems, major economies such as the United States, China, Japan and Europe multilaterally and through international agencies should encourage the acceleration of economic reforms such as those proposed by the Saudi Crown Prince. Forty years of military buildups have failed to bring peace and economic prosperity to the Middle East. While it is unlikely that the Middle East oil exporters will intentionally escalate regional proxy wars in a manner that leads to the destruction of oil facilities, the nature of war can be irrational and unpredictable, hence explaining the return of the geopolitical risk premium to the price of oil. The hedge fund community, which trades in oil, has so far appeared relatively unconvinced by announcement of economic reforms in Saudi Arabia. It has also been skeptical of the success of the Iranian nuclear deal. Meanwhile, the oil industries of Syria and Yemen have been decimated by recent geopolitical conflicts. A similar fate befell Iraq and Iran during their eight-year war, our research shows. In light of this self-perpetuating cycle, industrialized governments would benefit from revisiting coordination mechanisms for use of strategic stocks, including discussions with Saudi officials currently visiting for how the United States could respond (in conjunction with Saudi Arabia?) to further deterioration of Venezuela’s oil industry. The United States imported just over 500,000 barrels per day (b/d) of Saudi crude oil last fall, the lowest level since May 1987 and down from 1.5 million b/d a decade ago. The kingdom is now the fourth supplier after Canada, Mexico and Iraq. The drop reflects more than rising U.S. production since Saudi Arabia and Venezuela supply a heavier grade of crude oil used by coker units that economically upgrade poorer quality crudes into light products like naphtha and gasoil. Rising tight oil production is a lighter grade of crude oil less desirable for coker units of the U.S. gulf coast. In years past, the U.S.-Saudi security partnership has included coordination of responses to sudden changes in global oil supply, including strategies that involved targeting Russia when lower oil prices were needed to send a firm message of geopolitical deterrence. The question is with the current Saudi-Russian oil bromance and the United States itself now an oil exporter, is this critical element to the U.S.-Saudi relationship still viable?

This post is co-written by Jareer Elass, an energy analyst who has covered the Gulf and OPEC for 25 years. He is a regular contributor to the Arab Weekly. This week, Saudi Crown Prince Mohammed bin Salman begins his two-and-a-half week-long visit to the United States—including a March 20 White House meeting with U.S. President Donald Trump. Top of the Saudi agenda will be to further cement close political ties between the three-year-old regime of Saudi King Salman Bin Abdulaziz Al-Saud and the Trump administration. That could be harder than it looks if President Trump brings up a request for Saudi Arabian financial support in Syria. Russia has also been publicly out hat in hand to the EU on Syria while behind the scenes trying to shake down Saudi money for Syria as part of its oil collaboration with Riyadh. Saudi Arabia is unlikely to support any peace process on Syria that sustains strong Iranian influence. Beyond the geopolitical, the crown prince is focused on the Saudi economy and wants to bring American business to Saudi Arabia. Regardless of how these complex topics play out, there’s no doubt that the young Saudi leader will have to be in public relations mode. Crown Prince Mohammed has already kicked off his trip with a long interview aired on the American TV news magazine 60 Minutes, in which he controversially indicated Saudi Arabia’s willingness to enter the nuclear arms race alongside chief rival Iran. The subject will be a tricky one: while Saudi Arabia and the United States share a common view that Iran is a destabilizing force in the region, the U.S. has been resistant to Saudi lobbying that standards for a U.S.-Saudi nuclear deal should allow either reprocessing spent fuel or enrichment of uranium. Washington Post columnist David Ignatius’s suggestion that Saudi Arabia try to cozy up to the United States by suspending its oil deal with the Russians to punish Russian leader Vladimir Putin for a recent string of unacceptable actions is also fraught with peril. That's because Putin could similarly be thinking that falling oil prices would hurt Saudi Arabia’s stability more than his own. The kingdom is vulnerable on the oil price front both due to domestic economic pressures and to lofty oil price levels needed to support the Aramco IPO valuation process. Analysts calculate that a sustained oil price around $70 a barrel is needed for the kingdom to hit valuation targets for the IPO consistent with the $2 trillion valuation used in announcing the plan. Raising the stakes, the Saudi crown prince’s visit to the United States follows a similar tour recently led by the Saudi foreign minister that failed to convince potential American investors that the current and future political climate in the kingdom is not a risky one. The tepid response from U.S. institutional investors during the road show makes the New York Stock Exchange (NYSE) increasingly unlikely to be favored as a final choice for the foreign bourse to be selected by the Saudi regime for the Aramco IPO. It has also made the timing of the listing murkier, thereby lengthening the time line for how long Saudi Arabia could need its cooperative oil arrangement with Russia to last. The Saudi case for the durability of its own political stability was shaken by reports in the New York Times last week of the Saudi government using “coercion” to wrangle billions of dollars’ worth of assets from targeted prominent Saudis, including members of the royal family. The report made clear that the campaign of intimidation against individuals who have been singled out for their alleged corruption is continuing, raising questions about the Saudi government’s end game. There have been several constants in what the Saudi government has said over the last two years about its intent to sell a stake in Saudi Aramco. When the IPO was first announced, it was said to involve a sale of up to 5 percent of the state firm, with a listing on the Saudi stock exchange as well as on one or more foreign bourses. According to the crown prince, Saudi Aramco’s valuation could be appraised at more than $2 trillion, with the Saudi government collecting as much as $100 billion from the limited sale. The Saudi regime has grappled with choosing an appropriate foreign listing from the outset amid concerns about the leading exchanges under contention—the NYSE and the London Stock Exchange (LSE)—and the fact that the stated valuation of 5 percent of Saudi Aramco could be hard to achieve. Meanwhile, the International Monetary Fund (IMF) has estimated that an average $70 a barrel is what the kingdom would need to balance its 2018 budget, though it has endorsed the kingdom’s decision to delay achieving a balanced budget until 2023 in an effort to avoid economic damage as Riyadh slows its pace on implementing fiscal reforms. Industry experts have been skeptical of the official projected valuation of the state oil firm, and indeed, by some accounts, the math doesn’t appear to work in Saudi Arabia’s favor, unless oil prices rise significantly and other criteria are met. Moreover, the kingdom’s new $70 a barrel price goal, which seems linked to the Saudi IPO conundrum, has divided members of the Organization of Petroleum Exporting Countries (OPEC), some of whom have been saying too high a rise in oil prices could be deleterious to OPEC’s future. Iran has publicly stated its preference for prices at around $60 a barrel because it believes that $70 could backfire on the group, prompting U.S. shale companies to bump up their output and a long run weakening of demand for oil, resulting in an uncontrolled collapse in future oil prices. The crown prince’s London visit has fueled rising speculation in recent months that the IPO would be delayed beyond 2018. Oil Minister Khalid Al-Falih in a March 8 interview referred to a 2018 deadline for conducting the IPO as an “artificial deadline”, noting that the “anchor market will be the Tadawul exchange” but emphasized that the kingdom has the necessary fiscal and regulatory framework in place for Saudi Aramco to be listed this year. Falih has also suggested that his government saw major issues associated with choosing the NYSE for a foreign listing of Saudi Aramco shares, saying that “…litigation and liability are a big concern in the U.S. Quite frankly, Saudi Aramco is too big and too important for the Kingdom to be subjected to that kind of risk” While Falih pointed to New York City’s decision earlier this year to sue five major oil firms over the “existential threat of climate change” as a concern, the Saudi government is equally worried about the ability of families of 9/11 victims to sue the Saudi government under the “Justice Against Sponsors of Terrorism” Act that was passed by the U.S. Congress in September 2016. During his London trip, the Saudi oil minister praised the LSE, saying that, “The London stock exchange is one of the best in the world, it is well-regulated and we respect it.” But, floating Saudi Aramco shares on the LSE is not without controversy. The U.K.’s chief financial regulatory body came under fire in the spring of 2017 when it recommended easing LSE rules to allow state-owned companies like Saudi Aramco to qualify for premium listing without being subject to the strictest corporate governance rules. The Hong Kong exchange could be a convenient compromise for the Saudi government in its pick for a foreign bourse on which to list Saudi Aramco shares. And then there is also talk of the Saudi government forgoing an IPO entirely and favoring a private sale to strategic investors, or a combination of a listing on the Tadawul and a private sale. This would be beneficial if the Saudi regime believed it was going to fall far short of the $2 trillion valuation and of course, it would free the kingdom from having to be overly transparent about its finances and operations as required by some foreign exchanges. But U.S. officials have argued that a private placement with Chinese firms would not provide many of the structural benefits that come from undertaking a public listing. It would be surprising if the Saudi government failed to float Saudi Aramco shares on the Tadawul, given how the public expects to participate in the IPO and the desire for Riyadh to help build the Saudi exchange into the premier bourse in the region. But, one of the biggest concerns about a Saudi Aramco listing on the Saudi exchange is the lack of liquidity due to the Tadawul’s size. The Saudi exchange is small compared to major foreign bourses—with a market capitalization of around $470 billion and 171 listed companies, a stark contrast to the scale of the NYSE, which has a capitalization of $21 trillion and more than 2,000 listed companies. Tadawul officials have been preparing for the listing and have even recommended the Saudi exchange be the sole bourse for the Saudi Aramco sale. But, there is real concern that the Tadawul will not be able to absorb up to 5 percent of Saudi Aramco shares on offer, and that a large sale could cause much volatility on the domestic exchange, with the potential for investors to shed other company stocks rapidly to raise funds as they buy up Saudi Aramco shares. In fact, according to a recent report from the Energy Intelligence Group, the Saudi regime is reportedly calling on members of the royal family and wealthy Saudi businessmen to commit to injecting new funds into the Tadawul and to purchasing Saudi Aramco shares in a drive to prevent a destabilization of the domestic stock market when the IPO is launched on the local exchange. The Saudi Aramco IPO is the linchpin of the crown prince’s ambitious economic revamping program known as Saudi Vision 2030. Proceeds from the sale are to be directed to the kingdom’s sovereign wealth fund, the Public Investment Fund, which in turn will make investments designed to move the kingdom away from being an oil-driven economy. Though the Saudi regime has made progress on some economic reforms, the Saudi Vision 2030’s agenda to fundamentally transform the kingdom’s economy greatly depends upon the success of the limited sale of Saudi Aramco. That has injected a certain level of inflexibility into the kingdom’s oil policy that makes any talk of Saudi oil cooperation with the United States against Russia a lower probability course of action than it was in the past.

Authoritarians are on the rise around the world, but history shows they’re mostly helpless.

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 February 23 to March 4, was compiled with support from Alexandra Bro and Anne Connell.

About a year ago, a seasoned U.S. oil leader with deep political connections explained to me that U.S. shale would be out of the woods by 2018. His thesis was straightforward: he thought the U.S. economy would see improved growth under President Trump, pulling up global gross domestic product—and with it, oil demand. That growth would mean Saudi Arabia would be closer to maxed out on its capability to produce oil, no longer a significant threat to U.S. shale. Under this world view, American producers would be able wrest more market share in the future without fear of toppling prices, hence the Trump administration’s optimistic view of U.S. energy “dominance.” At the time, it seemed like a rosy prognostication. I pointed out how easily Russia, armed with a cheap ruble and flexible tax policy, could also increase its own oil output. But 2018 is now around the corner and that conversation now seems somewhat more prophetic. It raises the question: What would it mean for Saudi Arabia and U.S. shale producers if Russia does an about-face and makes a production push. It’s something to watch. Because, while Saudi Arabia might not be technically maxed out, global demand is on the rise and Saudi ability to flood the market to punish challengers is, at least for the moment, greatly reduced. Not only is the kingdom boxed in to supporting higher prices because of domestic economic pressures and its planned initial public offering (IPO) of state oil giant Saudi Aramco, it is also facing long term oil field problems that will not be cheap or easy to fix. Already this year, an unexpected corrosion problem at a significant pipeline at the large Manifa field reduced Saudi spare capacity. Saudi Aramco’s hefty new capital budget reportedly targets increases at three offshore fields by 2022 to replace declining capacity elsewhere but past efforts to expand sustainable production capacity have been a painstaking process, stretching over more than a decade at a cost of tens of billions of dollars. The next tranche will be even more challenging. Regardless of its handicap versus the United States and Russia at adding new producing areas in its oil fields, Saudi Arabia is not yet abdicating its leadership role. It took a pro-active stance towards recent deliberations to extend OPEC-non-OPEC production cuts into 2018. Saudi’s steadfast commitment to the deal was not initially reciprocated by Russia, which was more tentative in public statements leading up to the November OPEC meeting. The cat and mouse process led one seasoned journalist to note Russian President Vladimir Putin has “crowned himself king of OPEC.” The sequence of events prompted questioning whether Russia has finally achieved what four decades of sponsored military proxies failed to do—surreptitiously gaining sway over Saudi oil policy. For its part, Russia’s stated concern about a production cut extension was linked in part to the advantage higher oil prices are giving to U.S. shale producers. Russian oil companies complained to Moscow about their excess of 1.2 million barrels a day (b/d) of new oil field projects they’d like to green light. A Citibank report, “From Russia with Love – A Crude Romance,” suggests that not only do Russia’s largest companies have 300,000 b/d in idled current capacity, they are sitting on some 23 fields that could add substantial new production in the next five years, including 14 fields on state firm Rosneft’s books aggregating 770,000 b/d. Russia also has untapped shale potential. Any Russian increases will come head to head with rising U.S. oil production, which the U.S. Energy Information Administration said last week could hit 10 million b/d in 2018, up 780,000 b/d. Analysts at Cornerstone Macro are similarly bullish on U.S. supply, especially should prices be above $60 a barrel. They project U.S. tight oil production could rise by 960,000 b/d next year (ex-natural gas liquids) and an additional 770,000 b/d in 2019, if prices hold around $60, bringing total U.S. crude oil production above 11 million b/d over the next two years. Increases would be even larger in a $65 oil price environment, Cornerstone Macro suggests. Longer term, the upward potential for U.S. production could be substantially higher than that, with some estimates as high as 20 million b/d. The storyline that lack of access to new funds would force capital discipline and thereby lower production gains, (e.g. focus on profits, not growth), looks increasingly questionable given that oil and gas exploration and production companies have raised more than $60 billion in bond sales so far this year, levels typical of pre-price drop conditions. Unlike past, higher risk efforts, this year’s borrowing is supported by hedging activities. Right now, production disruptions in Venezuela, the U.K., and Iraq are supporting prices in addition to a war premium fueled by raging proxy wars across the Mideast. Traders, shale investors, and even reportedly Saudi Arabia, are betting that continued problems in Caracas, among other locales, will make ample room for U.S. rising production. Longer term, there are more producers in line to increase exports, including Iran, Iraq, Brazil, and Canada, to name a few. But the real geopolitical showdown for market share will likely come down to Russia and the United States: who can bring on new oil fastest? A looming U.S.-Russia oil and gas rivalry has deep geopolitical implications. It works against improvement in bilateral relations and is a delicate security matter for trading partners of both countries. The possible conflict over market share is existential to Russian power. Washington’s energy dominance tack, which recently included an announced gas export deal for Alaska during the Trump visit to Beijing, sounds as threatening to Russian ears as NATO expansion did a decade or more ago. Not only does Russia rely heavily on its energy exports for its statist budget and as a diplomatic lever, but the commanding heights of Putin’s inner circle and his grip on power is intimately inter-linked with Russia’s oil and gas elite. Russian influence and economic health has suffered in the past from orchestrated alliances between the United States, Saudi Arabia, and Qatar that targeted Russia’s energy earnings. The threat of rising U.S. oil and gas exports could be one factor encouraging increasingly risky Russian adventurism since doing nothing about it could neutralize a major tool of Russian foreign policy. For now, Russia seems content to collaborate with Saudi Arabia on oil market stability which ironically also suits the current U.S. administration, whose America first jobs message is tied heavily to the economic engine of the shale revolution. But that delicate oil truce rests on the back of Venezuela and its woes, which is making space for everyone. At some later date, if Saudi stability seems vulnerable to continuing proxy wars in the Middle East, Putin may be tempted to see if he can tip the scales further in Russia’s favor, making additional space for his long term export surge and rendering his giant reserves all the more important. This article first appeared as a “Gray Matters” column in the Houston Chronicle.

Women’s advocates have long championed gender parity as a moral issue. But in the modern global economy, eliminating obstacles to women’s economic participation is also a strategic imperative.