Oil and Petroleum Products

The Organization of Petroleum Exporting Countries (OPEC) decision to cut oil production by 1.2 million barrels a day (b/d), together with Russia and a few other non-OPEC producers, may have garnered the organization’s members a few extra dollars temporarily, but it belies larger problems ahead for the 57 year old cartel. OPEC has weathered many geopolitical and economic challenges in the past, not the least of which was surviving land wars between countries in its membership and multiple crashes of oil prices below $10 a barrel. But, like many things changing in the current world order, OPEC’s mission is starting to look increasingly anachronistic and events swirling around the meeting last week in Vienna foreshadow conditions that might require more introspection than the organization or its members will be able to muster. The United States’ response to OPEC may also seem effective in staving a rise in oil prices this autumn, but Washington also needs to give further examination to its long run strategy regarding the cartel. Two of the big side disruptions at OPEC’s latest December gathering was the appearance of Brian Hook, Special Representative for Iran and Senior Policy Advisor to the Secretary of State at the U.S. Department of State, at the sidelines of the meeting and Qatar’s surprise announcement it would be quitting the organization. Mr. Hook confirmed to reporters just ahead of the OPEC meeting that the U.S. had to grant waivers to Iranian oil sanctions “to ensure we did not increase the price of oil.” The envoy said ahead of the OPEC meeting that he expected a “much better-supplied oil market” in 2019, when he said the U.S. would be in a “better position to accelerate the path to zero [Iranian Oil Exports].” The role of the United States in choosing the pace at which to eliminate Iranian oil from the market explicitly based on oil prices raises all kinds of thorny problems both for OPEC and for U.S. policy makers.  U.S. sanctions on Iran and any waivers were clearly a factor OPEC has had to consider in forecasting global oil market supply, but the appearance of Mr. Hook at the sidelines of the OPEC meeting in Vienna last week was problematical because it implied, perhaps accidentally, a level of coordination that goes beyond just jawboning allied oil producers to put out more oil to replace Iranian barrels. The controversy surrounding Mr. Hook’s visit to Vienna calls attention to the age-old question that has plagued OPEC in recent years: what oil price should be considered too high or too low? One might have thought that issue would have been front and center in OPEC’s recent deliberations. As prices rose to $86 in October, the ramifications for emerging market economies looked dire. U.S. President Donald Trump took to twitter and both publicly and privately the U.S. made the point that oil prices above $65 would be problematic for the global economy. There seemed to be evidence to that view as economic growth and oil demand appeared to falter in the months when oil prices were climbing. Earlier this year, Saudi Arabia indicated that oil prices of $70 to $80 might be more to its liking, begging the question whether the kingdom’s own economic pressures would prompt it to view the world’s ability to absorb higher oil prices too optimistically. OPEC has used the vocabulary that it is just trying to “stabilize” oil prices or “balance” the market but those terms are meaningless without a reference to a price range at which that stability would be defined. Certainly, OPEC and Saudi Arabia specifically, can ill-afford pushing oil prices up to costs that would harm the health of the global economy and thereby crater oil demand more extensively. In that regard, the United States and Saudi Arabia should be seeing eye to eye. Moderate oil prices seem to be in OPEC’s long run interests, not only to avoid a massive drop in oil demand, like the one seen in 2009 during the world financial crisis, or like in 1998 from the Asian flu, but also to stave off the acceleration of competing technologies that might someday bring about a peak in global oil demand.  The higher the oil price now, the more unconventional oil and gas is likely to leave U.S. shores in the coming years, and the more large logistics companies and others will shift to optimization technologies that will limit oil use. There is also the bevy of alternative transport fuels waiting in the wings for the new oil price spike, including electric batteries, natural gas and hydrogen.   The very concept that these alternative technologies exist has changed the politics of U.S. oil-for-security alliances from within U.S. domestic political leadership circles. U.S. Democrats are far more vociferously questioning the usefulness of the U.S.-Saudi alliance these days. Importantly, Democrats are still highly committed to the clean energy transition so any arguments that Saudi Arabia is an important U.S. ally on oil prices falls on deaf ears. Oil price volatility is a defacto raison d’etre to support electric vehicles and the full left-wing agenda on clean tech. Thus, President Trump’s rhetorical comment that a failure to resolve U.S.-Saudi differences constructively could lead to $150 oil fails to stimulate concerns. High oil prices promoted by OPEC would undoubtedly hasten the clean tech revolution while at the same time stimulating U.S. jobs in the shale industry. If U.S. motorists don’t agree, the U.S. Congress has a piece of legislation to sell that would authorize the U.S. attorney to file anti-trust charges against OPEC for manipulating oil prices. That legislation weighed into OPEC’s deliberations in Vienna and might be one reason Qatar has chosen to quit the organization since passage of the legislation could affect U.S. infrastructure assets such as LNG export terminals and refineries owned by OPEC members. In early October, Qatar’s current energy minister told the press that peak oil demand was real and that the world was “pushing oil away as much as possible.” Other OPEC countries have expressed similar concerns privately, pitting them against fellow members who might favor policies that produce short term revenues. As Democratic leaders have been suggesting, there is a coming wave of energy innovation that could mean Saudi Arabia will play less of a role in changing global energy markets. The Saudi leadership is well aware of this existential problem and it is likely one of the reasons its role in global affairs has become more erratic. But while these technological gains are transforming global energy markets, they are not a spigot. Their exploitation requires the investment decisions of dozens of independent private companies who are following market signals and government incentives that have been unsteady of late. The gradual nature of the digital energy transformation means that temporary events, most recently the economic crisis in Venezuela and U.S. sanctions on Iranian oil, can give OPEC, and even Saudi Arabia on its own, substantial, albeit brief, market power. This proved an uncomfortable fact for U.S. President Donald Trump this fall and for the fragile global economy more generally. It is the reason the U.S. Congress is looking at legislation to defang OPEC. As the U.S. Congress debates various options, it should continue its policies supporting U.S. makers of electric cars especially because alternative engine technologies help wean the global economy off its reliance on OPEC oil more rapidly. As recent commodity price volatility and OPEC’s recent deliberations shows, that will take more than just exporting two or even three million barrels a day from U.S. shores given ongoing instability in many oil producing regions. In trade talks with China and European automakers, the Trump administration should shift to be a leading voice promoting advanced automotive technology, including for trucks, and adjust any proposed tariff rates accordingly to incentivize advance of new technologies. Congress should protect policies promoting advanced automobiles in the U.S. and consider stronger efficiency standards for delivery trucks and large freight vehicles. Congressional leaders should also press the Trump administration to quickly settle favorably with California on standards for diversified fueling options. The administration must give more weight to the fact that use of alternative fuels at home in cars and trucks (electricity, natural gas and biofuels) would free more U.S. oil for export to water down the importance of Saudi oil. It’s time to recognize that it is no longer wise to say the United States must back erratic actions of oil producing states because of their premiere role influencing global economic trends. More direct U.S. leadership to reduce the world’s vulnerability is needed, not only for one OPEC meeting, but for a more strategic future.

Relations between the two countries, long bound by common interests in oil and security, have strained over what some analysts see as a more assertive Saudi foreign policy.

This is a guest post 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.  As the 2019 budget season approaches, Saudi Arabia has made a point of announcing strong figures for the first three quarters of 2018. In a sign that Riyadh would like to continue this robust economic health into 2019, Saudi Oil Minister Khalid Al-Falih on Sunday announced Riyadh’s plans to cut crude exports by five hundred thousand barrels a day (b/d) next month. This effort would counter any buildup of oil inventories going into next year. The minister made his remarks in Abu Dhabi on the sidelines of a technical market monitoring meeting of the Organization of Petroleum Exporting Countries (OPEC) and other producers including Russia.  The Saudi minister’s statement was meant to signal Saudi Arabia’s desire to push the oil producer coalition towards an agreement to make a new round of oil production cuts at its upcoming full meeting in December. Agreement would help ensure oil prices don’t collapse, particularly as U.S. crude production continues to surge. That strategy, however, could put the kingdom directly at odds with the Trump Administration, which continues to voice concerns about high oil prices. When announcing temporary waivers for Iranian oil sanctions last week, U.S. officials specifically noted the necessity to delay full implementation of the new sanctions to prevent global oil markets from overheating. Some OPEC officials were miffed by the U.S. waivers, which they didn’t anticipate in their calculations earlier in the fall to increase production which is now contributing to the fall in oil prices. Strong economic showing is important to the Saudi government, which is now benefiting from its smartly conservative budget process for 2018, as well as fiscal reforms that have brought in more non-oil income. The Saudi Finance Ministry reported in its third quarter budget analysis that the kingdom had slashed its deficit by 60 percent from $31 billion to $13 billion in the first nine months of 2018 when compared to the same period last year. The ministry credited substantial growth in both oil and non-oil income. The kingdom’s total revenues for the first three quarters of 2018 grew by 47 percent compared to the same period last year to nearly $177 billion. That included a similarly large jump in oil revenues during the first nine months of this year to $120.5 billion compared to the same period in 2017. Saudi oil revenues rose 63 percent between the third quarter 2017 to third quarter 2018 to around $41 billion, attributable to not only higher oil prices but to the kingdom’s high production rates in recent months. However, the Saudi government believes the strides made in non-oil income so far in 2018 deserve particular credit. Non-oil income grew 45 percent from third quarter 2017 to third quarter 2018 to total $18.5 billion. Referring to the third quarter 2018 budget analysis, Saudi Finance Minister Mohammed Al-Jadaan said, “While clearly assisted by improvements in the oil price internationally, these figures also show the fruits of the successful implementation of many initiatives to develop non-oil revenues and improve spending efficiency.” The Saudi regime reported that even though the deficit had fallen in the first nine months of 2018, government spending rose by 25 percent from the first nine months of last year to nearly $190 billion in 2018. Riyadh highlighted the new Citizen’s Account social benefits system that was established at the end of 2017, as well as higher living allowances and infrastructure spending for the rise.  The Citizen’s Account system covers approximately three million families and 10.6 million beneficiaries -- the equivalent of half of the kingdom’s population – and was intended to blunt the repercussions from fiscal reforms, including reductions in domestic energy-related subsidies and the introduction of both a “sin tax” and a 5% value-added tax (VAT) -- the latter of which was implemented last January. The government anticipated spending as much as $8.5 billion in 2018 in monthly Citizen’s Account payments to recipients, who are comprised of lower- and middle income Saudi nationals. The government does not seem to be planning on curtailing the welfare assistance program in the coming year. When the Saudi government announced its 2018 budget last December, it had forecast a deficit of $52 billion. But last month, the finance minister reported that the kingdom would see a deficit closer to $39.5 billion. While fiscal reform has certainly helped – including an expected windfall of $6 billion from a year’s implementation of the VAT – the improved deficit benefited from the fact that the Saudi government conservatively based its 2018 budget on a Brent oil price of between $51-55 a barrel. Spot Brent prices are expected to average around $20 a barrel higher than that in 2018. However, as upbeat as the latest figures are, the Saudi economy still faces challenges ahead that have been exacerbated by the circumstances surrounding the death of Saudi journalist Jamal Khashoggi. In the week ending October 18th, the Saudi Tadawul stock exchange saw sell-offs totaling close to $1.1 billion. The Tadawul continued lose foreign owned stocks the following week before the Saudi government was rumored to have swiftly intervened to restore market stability.  A healthy stock market is one of the central pillars of the Saudi government’s plans to restructure the kingdom’s economy away from a dependency on oil revenues. The Tadawul has been touted as an integral component of the much-awaited initial public offering (IPO) of Saudi national oil company Saudi Aramco. The sudden drop in the Saudi stock market in light of the Khashoggi affair has raised concerns anew about whether the Tadawul has sufficient liquidity to handle Saudi Aramco shares, especially if it could be vulnerable to domestic uncertainties. Foreign direct investment in Saudi Arabia has also been dropping, reportedly by as much as 80 percent between 2016-2017 – declining to a 14-year-low. Capital flight from Saudi residents has also been on the upswing. According to a JPMorgan report, which was published prior to the Khashoggi scandal, capital outflows from residents in Saudi Arabia was expected to reach $65 billion this year, or 8.4 percent of GDP. However, this figure is notably lower than the previous year’s figure of $80 billion. Reduced foreign direct investment and increased capital flight would mean the Saudi government will have less flexibility on oil prices. Senior U.S. officials have called on Riyadh to wind down the costly Yemen war, but it remains unclear how events on the ground in Yemen will proceed. As a new U.S. Congress takes its seat and the U.S. president makes his position on oil prices well-known, OPEC is taking a cautious approach to how it communicates about oil prices. In oil markets, all eyes will be on Saudi Arabia as its policies towards OPEC and Yemen will be watched closely.

This is a guest post by Benjamin Silliman, research associate for Energy Security and Climate Change at the Council on Foreign Relations.  When the Trump administration announced temporary waivers to sanctions on Iran’s oil last week, officials cited concerns about global oil price spikes. The more cautious approach appears to have given oil markets a reprieve, but the Organization of Petroleum Exporting Countries (OPEC) may consider a new round of production cuts when it meets in Abu Dhabi on November 11th. Central to decision making for both U. S. leaders and OPEC ministers is a debate over the signs of distress in major emerging markets. Expectations for the price of oil in 2019 are particularly scattered with predictions ranging between $65 and $100 per barrel. The $100 camp focuses mainly on tail risks to oil supply, including disruptions involving the Iran sanctions, continuing loss of production in Venezuela, and questions over Saudi and Russian output. However, oil is also experiencing negative contagion effects from other markets, especially indicators of financial vulnerability in emerging economies. Severe currency devaluation threatens sustained oil consumption in some of the most rapidly developing markets, prompting some analysts to predict that the current downward move could become more permanent. Paradoxically, any sudden upwards movement in oil prices could stimulate their eventual collapse by pushing weakened economies over the edge. Structurally, technology and efficiency gains in the countries of the Organization for Economic Cooperation and Development (OECD) have been flattening oil consumption in recent years. But global oil demand has been supported by rapid growth in emerging markets. For example, China, India, Russia, Brazil, Turkey, Argentina, and South Africa are some of the largest sources of growth in the world. Together, their consumption has grown about 16% in the past five years. Figure 1 demonstrates the magnitude of growth in developing countries as compared to the OECD. Now, after years of remarkable growth, these economies are experiencing tougher times, as manifested by ongoing currency and inflationary pressure, tightening monetary policy, and U.S. inspired trade wars.   U.S. tariffs against Turkey, followed by Turkish retaliation, have stymied the flow of U.S. dollars into the Turkish economy. Without strong currencies supporting the lira, it sank nearly 40 percent against the dollar in just 8 months. But, Turkey was not the only country to see economic problems and the dollar rise affect its currency. Argentina’s peso has also fallen more than 45 percent versus the U.S. dollar in 2018 after the United States Federal Reserve raised interest rates and the country moved to dollar-defined assets. So far this year the South African rand, Russian ruble, Brazilian real, and Chinese yuan each fell more than 9 percent against the dollar. As the U.S. dollar has risen  compared to a mix of standard international currencies, oil has risen in effective price because oil is priced in dollars on the international market. Emerging market countries have been hit not only by the nominally higher price of oil, but also by lower value currency with which to purchase it. With significantly more expensive energy, some analysts are predicting a slowdown in the oil market. At a minimum, it will drive affected countries to find ways to reduce oil consumption until their currencies stabilize, hence the sentiment of slowing oil demand as we enter 2019. These seven countries mentioned above account for more than one-fifth of the world’s oil consumption. While changes to demand from currency devaluation has been small so far, rising interest rates in some of the same countries could slow new investment, thus creating concern about recessionary pressure. South Africa’s economy is already succumbing to harder economic times. Turkey’s geopolitical ally, Qatar, has attempted to mitigate a recession with a pledge of $15 billion in direct investment into Turkey’s financial markets and banks. Now all eyes are on China and India, which appear to be posting slower economic growth than expected. The global oil industry has weathered emerging market crises in the past. Thailand saw swift growth in the early 1990s owing to foreign direct investment, but then experienced a sharp economic setback when the United States raised interest rates in 1997. A shortfall of foreign currency at that time forced Thailand’s government to float the exchange rate of the baht, which dropped nearly 40% in value against the U.S. dollar to which it was once pegged. Aptly dubbed “The Asian Flu,” Thailand’s currency crisis spread to Singapore, Malaysia, Indonesia, the Philippines, and eventually China and Japan. Slumping Asian currencies began to impact regional stock markets, bringing about a full-blown Asian recession and accompanying slowdowns in oil consumption. Between 1997 and 1998, Asian oil consumption fell by 1.9%, a dramatic reversal from extraordinary growth of 4.5% between 1996 and 1997. China’s oil use fell by 0.3% in 1998, a sharp reduction from its prior growth rate of 11.5%. The sudden drop in Asian demand sunk the price of oil as low as $10 a barrel. Evidence of easing oil demand growth has started to gain attention in recent months. Figure 2 shows the relatively flat to declining oil demand trends for China, India, and South Africa. Brazil’s trends have been more volatile due to worker strikes last spring that included work stoppages by truckers. Notably, oil use growth in China has moderated this year, partly due to advancements in energy efficiency and also possibly a signal that economic growth has been slower than recognized. India saw big consumption growth earlier in the year, but it has fallen off as oil prices have risen. These trends call into question the wisdom of assuming that growth in emerging markets will continue to drive oil prices into 2019-2020. All of this means that predicting oil prices for next year may be more of a dice roll than usual. Countries must walk a tightrope in terms of trade policy, monetary policy and oil production for major oil exporting countries. Any misstep could trigger further economic deterioration and that, as the announcement of the start of U.S. sanctions on Iranian oil exports demonstrated, is constraining choices.

Federal investigators in Brazil have uncovered corruption at the highest levels of the government and in the country’s largest corporations.

Renewed U.S. sanctions against Iranian oil exports kick in officially this week as part of the Trump administration’s decision to exit the Iranian nuclear deal. Estimations on how effective the sanctions have been is a relatively messy affair to date. Iran is expected to lose between 1 million to 1.5 million barrels a day in oil sales to Europe, Japan, South Korea, and India, with speculation that some of that oil might wind up instead in China or being repurposed in barter trade with Russia. Today, the U.S. government officially confirmed it was handing out temporary waivers to several of the countries that had previously announced intentions to go to zero purchases from Iran. Snatching defeat from the jaws of victory, the announcement, aimed to keep oil markets from overheating, calls into question the ultimate effectiveness of the Trump Iranian sanctions project overall. Worse still, it has simultaneously lay bare the fact that President Donald Trump, like countless U.S. presidents before him, has to worry about global oil prices in conducting foreign policy, despite an abundance of U.S. domestic energy. Iran has long experience in trying to avoid restrictions on its oil sales including turning off internationally-required tanker transponders to make it harder to track its shipping movements. But available satellite assisted tracking technology has improved since 2012, the last time the U.S. imposed sanctions on Iran. Tracking services are now offering up to the minute updates on Iranian oil exports, helping to illuminate the shadowy world of smuggling. One famous service, Tanker Trackers, even located with precision recent Iranian deliveries to China’s strategic petroleum reserve in Dalian. In years past, Iran has tried to entice major trading partners to evade sanctions compliance by promising sweetheart oil and gas exploration and other lucrative commercial deals. But the more uncertain long range commercial outlook for prolific Middle East reserves weakens Tehran’s bargaining chips. Fewer players, be they government-run firms or private companies, are looking to increase access to oil reserves in a place like Iran these days. After losing billions in investments in geopolitically risky international oil and gas ventures, China’s government has shifted efforts to new, clean energy technologies like renewables, batteries and automated cars. Europe’s big oil companies like Norway’s Equinor, France’s Total, and Royal Dutch Shell are also shifting to renewables and minding their knitting in places with less geopolitical risk. Also losing interest in risky international ventures, many American firms are squarely focused on new North American shale reserves that are now challenging the Middle East for market share. Many European, Japanese, and South Korean refiners initially responded to the Trump administration’s call for zero purchases of Iranian oil by quickly saying they would comply with the new U.S. sanctions, and French firm Total abandoned its natural gas development project in Iran. Ironically, all these pledged sanctions compliance announcements shook oil markets which were already tightening from a deal between the Organization of Petroleum Exporting Countries (OPEC) and Russia to limit supply to boost the price of oil. That prompted U.S. President Donald Trump to start tweeting at Saudi Arabia to intervene with more oil as they had done when then U.S. President Barack Obama had hardened Iranian oil sanctions in 2012 to get Tehran to the negotiating table. Had oil markets been oversupplied at the time the Trump administration was initiating new Iranian sanctions, chances are most countries would have begrudgingly gone along in a manner that would not have disturbed oil prices or added risk to the global economy. But in the context of a crisis-torn Venezuela and surprising reports that Saudi Arabia’s ability to produce more oil was more limited than previously supposed, the administration was faced with harder choices. Before offering its official statement on October 31, 2018, that “sufficient” oil supplies existed to permit a significant reduction in the petroleum purchased from Iran, the administration first jawboned Saudi Arabia to increase its production further, and then, in the aftermath of the Khashoggi scandal and related public U.S.-Saudi strains, the U.S. State Department was forced to hint that waivers would be given to countries having difficulty finding replacement barrels for Iranian purchases. Oil prices began to recede. In all, eight countries officially received such  temporary waivers, including Turkey, India and South Korea late last week. The waffling on sanctions enforcement has definitely helped with oil prices but it means that Iran will have an easier time finding outlets for its oil production, even if it can only take back goods as payment and not cash. Added oil supplies are expected on the market in early 2019 when infrastructure additions will allow higher exports of U.S. crude oil. U.S. diplomats are also working to free up more oil from northern Iraq and the Saudi-Kuwaiti neutral zone in the coming months. That Trump had to berate the Saudis and then capitulate on Iranian sanctions enforcement is a testament to the limitations of U.S. energy independence. Unlike in OPEC countries, additional U.S. oil export capacity isn’t just magically available on demand by pronouncement by government leaders. The pace of investment in new oil wells, export pipelines, and terminals is in a cacophony of dozens and dozens of independent, uncoordinated commercial oil company decisions that are dictated by markets and capital planning processes. Over the next month or two, rising U.S. oil production, which hit its historical record this month, remains stuck inland, constrained by pipeline bottlenecks. Even when those bottlenecks help keep the price of oil in Texas at a discount to international levels, it doesn’t help the Trump administration, which has to worry about how any shock in the global price of oil would disturb its broader goals that are related to the dollar, trade and global economic growth. That reality became even more apparent when Saudi Arabia hinted it could unsheathe its oil weapon after 44 years of quiescence, if the newly-elected U.S. Congress chooses to enforce the Magnitsky Act in response to the death of Jamal Khashoggi.  Reminding Americans of previous gasoline lines caused by the 1973 Saudi oil embargo, a Saudi commentator noted that the Saudi energy minister’s need to deny the possibility of a replay of 1973 signaled “to those who understand global politics that Saudi Arabia had many cards to play.” The incident laid bare an ugly reality: even with all our newfound oil and gas, America and its allies still need strategic stocks to protect the global economy from any rising petro-power that would try to use oil to blackmail the West into compliance to a political result they don’t want. U.S. production, though responsive to rising prices, is not able to surge rapidly enough to damp down a sudden supply shock. This was certainly noticed in China, which is only half way through building its own stockpile expected to reach 850 million barrels by 2020. China has increased its pace of stock building in the past few weeks, ironically with soon to be sanctioned Iranian oil. It is also a result that has taught a new generation of U.S. leaders about the limits of American oil power.

Ongoing negotiations between FRELIMO and RENAMO, which had resumed in 2016 following some armed conflict, have been suspended; the sticking point between the two movements appears to be the disarmament of RENAMO and the recent elections earlier this month, whose results RENAMO disputes.  Mozambique’s political life continues to be dominated by two political movements: FRELIMO, the ruling party, and RENAMO, the political and erstwhile military opposition. FRELIMO led the struggle for Mozambican independence from Portugal in 1975 and has been in power ever since, while RENAMO has been in opposition. The two movements have different ethnic bases, but the hostility between the two movements also reflected the liberation struggles elsewhere in southern Africa, especially in Rhodesia, now Zimbabwe, and apartheid South Africa. The Soviet Union supported the nominally communist FRELIMO, while Rhodesia and South Africa supported the nominally anti-communist RENAMO. The two movements fought a bloody civil war from 1977 to 1992 characterized by gross human rights violations by both sides. It ended when the Soviet Union collapsed, stopping its support for FRELIMO, and apartheid South Africa became a “non-racial” democracy, stopping its support for RENAMO. Subsequently, FRELIMO prevailed, but RENAMO remained viable and its cadres did not disarm. Nevertheless, post-civil war, the country appeared to be on a positive development trajectory, with economic growth rates as high as 8 percent per year. That ended in 2016 when the country defaulted on its loans because of irregularities in three companies allegedly controlled by the intelligence services. International financial institutions and donors suspended aid. The growth rate fell to little more than 3 percent. It is against this backdrop that elections took place.  Relieving this gloomy picture is the prospect of immense hydrocarbon wealth, primarily from natural gas. Major international companies, including Exxon Mobil (US), Eni (Italy), and SASOL (South Africa) are actively engaged, though actual oil and gas production is some years off.  There is also an Islamist extremist insurgency in northern Mozambique, along the border with Tanzania. There are reports of beheadings and that insurgents have links to al-Shabab. It is also believed that that the militants (or at least some of them) come from neighboring Tanzania. The Mozambican authorities are trying to keep the militants out of the areas of interest to the hydrocarbon companies.  There are reasonable chances that the party negotiations, led by President Filipe Nyusi and RENAMO’s Ossufo Momade, will get back on track, not least because it is in their mutual interest that they do so. Harder to predict is the trajectory of the Muslim insurgency. Is it driven primarily by local causes? Is it linked to al-Shabaab? How skillfully will the government respond? The latter question is particularly important. Elsewhere in Africa brutal and inept government responses—see Nigeria and Cameroon—have made insurgencies worse.

Threatening a price hike might work in the short term, but it would come with serious costs to the kingdom’s reputation as a moderating influence on oil markets.

The longer I write about oil, the more I have become convinced that names and faces can change but the basic storylines repeat themselves. For students of history, it might be tempting to say that this is because each generation of new blood comes without the experiences of the past. But perhaps it is just the nature of oil. The inexorable boom and bust pattern of the oil market follows a geopolitical cycle that has proven next to impossible to break. Geopolitical events of the past few weeks look poised to show both the U.S. president and Middle Eastern leaders how difficult it is, even with so many structural changes in energy markets, to avoid debacles of the past. Famous TV anchor and Saudi media figure Turki Aldarkhil wrote on government-owned news service AlArabiya, “If U.S. sanctions are imposed on Saudi Arabia, we will be facing an economic disaster that would rock the entire world.” The commentary continued, “Riyadh is the capital of its oil, and touching this would affect oil production before any other vital commodity. It would lead to Saudi Arabia’s failure to commit to producing 7.5 million barrels. If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure.” He continued, “An oil barrel may be priced in a different currency, Chinese yuan, perhaps, instead of the dollar. And oil is the most important commodity traded by the dollar today.” In larger print, a summary statement warned, “There are simple procedures, that are part of over 30 others, that Riyadh will implement directly, without flinching an eye if sanctions are imposed.” No doubt, rising tensions between the United States and Saudi Arabia surrounding the circumstances of missing journalist Jamal Khashoggi has become an oil matter of rising importance. The escalating incident has laid raw an uncomfortable fact: serving as the central bank of oil requires a steady hand. Global oil markets were already tense upon speculation that the kingdom’s spare capacity, the amount of extra oil production that can be brought online quickly within 30 days and maintained for 90 days, was lower than previously thought. For years, Saudi Arabia has maintained it has the ability to raise production to 12 million barrels a day (b/d) and stay at that level. But analysts have recently said the kingdom may be currently producing almost at its maximum, and would need to make investments to be able to raise production further. Energy Intelligence Group reported earlier this month that “producing beyond 11 million b/d will take significant drilling and require more rigs.” The oil newsletter also reports that the kingdom will be able to add more oil to markets once the repaired Manifa field can come back on line in January 2019. Its expansion at the Khurais field is due to add 300,000 b/d by mid-2019. The Saudi oil minister has stated production is currently at 10.7 million b/d and sources report the kingdom has also sold oil from storage in September and October. Prior to the new U.S.-Saudi tensions, U.S. President Donald Trump had repeatedly expressed frustration over Twitter regarding Saudi Arabia’s wavering hand on global oil markets. Twice in recent months, the kingdom’s statements of intended closer oil collaboration with Russia to support oil prices have been met with marked public displeasure from the White House, prompting the Saudi oil minister to reverse course at recent gatherings of oil producers in a sign that Riyadh viewed its long standing relationship with the United States more critical than its newer ties to Moscow. But in an example of how difficult oil diplomacy can be, oil prices continued to rise on fears that any new supply disruptions could not be physically met by either increases in supply from Saudi Arabia (based on capacity constraints) or from the United States whose production increases are temporarily stalled by pipeline bottlenecks. With oil as the backdrop to new additional strains in the U.S.-Saudi relationship over other matters, President Trump told supporters in a highly personal reference at a rally last week, “King, we’re protecting you. You might not be there for two weeks without us. You have to pay for your military.” The escalating rhetoric between Saudi Arabia and the United States is bound to harken back to memories of past colossal oil debacles of 1973 or 1979, for those old enough to recall those turbulent times. My book with Rice University econometrician Mahmoud El-Gamal has a chart on page 35 in chapter 2 that might give solace to U.S. policy makers. It shows how U.S. real per capita gross domestic product recovered quickly in the 1980s while that of Saudi Arabia collapsed and did not start recovering until the mid-2000s. But there is another lesson in my book as well. National oil companies (NOCs) that face a geopolitical collapse take years, if not decades, to recover, if they recover at all. Today, there are many NOCs at risk simultaneously, whether from war, international sanctions, financially destabilizing policies of populist leaders, or via anti-corruption campaigns that have left some important NOCs rudderless. That situation has lowered the resilience of oil markets, even with the positive role of U.S. oil and gas exports and emerging oil-saving digital technologies. The reverberations would be large if an erratic U.S.-Saudi relationship or any internal Saudi domestic political or economic issues were to damage the future operational efficiency of state oil firm Saudi Aramco. That said, the United States has shown on many occasions that it has many other values that supersede oil, including international norms of behavior, free democratic elections, and freedom of speech. U.S. sanctions against Russian metals firm Rusal and its officers will be one such case. Those sanctions were imposed by the Trump administration despite a large impact on global aluminum markets and Russia’s important role in oil markets. In a prior Republican administration, justice for the families of victims of Pan Am flight 103 took priority over oil holdings in Libya. Generally speaking, history has judged taking a stance on democratic principles in precedence over oil positively, even when outcomes are less than positive in the immediate aftermath. Virtually no American historian looks back on 1973 and suggests the United States should have backed down on its foreign policy to avoid an oil embargo. More disagreement exists on whether U.S. support for the Shah of Iran’s top down modernization program, implemented via massive repression across Iranian society, was smart or misguided. Active U.S. support for the Shah’s nuclear power aspirations and its Bushehr nuclear plant still haunts U.S. national interests four decades later. Much is at stake in the current escalating diplomatic crisis between Saudi Arabia and its long-time ally and backer, the United States. So far, oil traders appear to be assuming cooler heads will prevail. History would suggest that this sentiment might be mistaken. Middle East conflicts, once begun, tend to spiral towards disaster, regardless of the hard work of well-meaning diplomacy. Let’s hope this one proves to be the exception. 

Chidi Odinkalu and Ayisha Osori have published a book in Nigeria that says Obasanjo and his associates and supporters essentially stole $500 million to fund the incumbent’s efforts to amend the constitution so that he could run for a third term. The authors are both highly credible human rights lawyers. Among other things, Odinkalu is the former head of the Nigerian Human Rights Council and Osori is the former CEO of the Nigerian Women’s Trust Fund. The title of their book is Too Good to Die: Third Term and the Myth of the Indispensable Man in Africa. It is widely understood that former President Olusegun Obasanjo sought to change the constitution so that he could run a third time for the presidency in 2007, but Obasanjo has always denied that was his intention. In any event, the effort to change the constitution generated widespread opposition, and eventually was defeated in the National Assembly. Obasanjo supported his party’s successful candidate, Umaru Yar’Adua, for the presidency. Since he left office, former present Obasanjo has remained active politically, though his influence has declined. Politics everywhere can be expensive—the U.S. presidential election in 2008, including primaries, cost $2.8 billion. But, according to the book, among the sources of the $500 million illicitly used in Obasanjo’s failed third-term bid was the Excess Crude Account, a sovereign saving account funded by the difference in the world oil price and the price upon which the national budget was based. When the “Third Term Agenda” was at its high point in the mid-2000s, oil prices were high and the account was growing. Odinkalu and Osori also show that during his eight years in the presidency, Obasanjo exercised sole control over the national oil company, the Nigeria National Petroleum Corporation (NNPC). Nigeria’s oil and gas is produced through joint ventures or joint agreements between the NNPC and private oil companies. The Nigerian government receives the lion’s share of the profits, which in turn make up the majority of government foreign exchange. Some of the commentary in the Nigerian media on Odinkalu and Osori’s book makes the point that in some ways, Obasanjo’s administration was a continuation of the way things were done during the generation of military rule when public funds were used for political purposes. The Obasanjo administration, ostensibly a civilian government, was in fact a transitional episode between military and civilian ways of governing, and not just with respect to oil. For example, Obasanjo on occasion ignored Supreme Court decisions that he did not like, as had his military predecessors. His successor, however, obeyed Supreme Court decisions, as have subsequent presidents.  

The reality that many energy companies are getting more serious about investment in low-carbon solutions is getting lost in the political noise of the day.

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.      

There appears to be a list of conflicts and other kinds of issues that U.S. President Donald Trump and Russian leader Vladimir Putin touched upon during their meeting in Helsinki, and progress on any of them is bound to be slow. Oil made a headline during Putin’s remarks in the public session: Specifically, Putin reminded the U.S. president in front of the international media that “neither of us is interested in the plummeting of (oil) prices and the consumers will suffer as well” and called out oil as an area for collaboration, as expected. Whether it’s a threat or an offer is always hard to say with the Russian leader. But there are good reasons for U.S. officials to be cautious in the coming weeks and months about looking to Russia for “assistance” in the complicated geopolitics of oil and gas. Like many other conflicts and issues, Putin is promising all sides goods he likely cannot fully deliver. The United States should think longer and harder about what assistance Russia could actually provide to U.S. interests. My view is the bilateral dialogue should stick to more achievable priorities like arms control and improved bilateral lines of communications among top U.S. and Russian military brass to avoid accidental direct clashes. Unilaterally reducing vulnerability to the national security and cyber threats Russia can make against U.S. domestic targets should remain top priority, but oil perhaps belongs on the back burner. The reality is that Russia has made a policy of offering its assistance to national oil sectors under siege, including those who become targeted by U.S. sanctions. That policy has subjected Russian oil companies to all kinds of negative consequences that will hinder their balance sheets and make it more difficult for Russia to play a balancer role in the global oil market down the road. The United States needs to weigh any pledge of oil “cooperation” with America against Russia’s active involvement in troubled oil sectors as diverse as Venezuela and Iran. In the run up to the Helsinki summit, Iran’s senior advisor for international affairs Ali Akbar Velayati met with Putin last week and agreed to $50 billion in oil and gas sector investments. Russian giants Rosneft and Gazprom are in talks with the Iranian oil ministry about upstream investments. Earlier this year, Russia’s Zarubezhneft signed an oil field development deal with the National Iranian Oil Company (NIOC) to refurbish the Aban and West Paydar oil fields. Iran could believe that turning to Moscow will shield its oil and gas sector not only from attack by Arab separatists but also even (perhaps a little more far-fetched, but probably not in the minds of Iranian hardliners) Israel and the United States. The opposite could come to happen. If proxy wars escalate, Russian companies could get caught accidentally in the cross fire. In fact, both Tehran and Moscow alike could lose from deepening their collaborations in Iran’s domestic oil and gas sector. Iran may want to consider what happened to Turkmenistan, whose energy exports were forced into Russia at cheap domestic Russian prices to allow Russian companies to export more of their own gas at higher levels to European buyers. That is one reason many Central Asian countries eventually turned to China for assistance with energy and electricity as the conflict of interest and strings attached were less onerous. For its part, Russia could find that Russian oil workers will be in a vulnerable position to spontaneous local protests and attacks, both inside Iran and Iraq, regardless of the overall tone of high level, government to government interactions. The latest example is Iraq, where angry local protesters lashed out this week at a number of targets but notably gathered to threaten an oil field operated by Russian firm Lukoil. The event, which so far hasn’t resulted in major oil supply cutoff, is a reminder that Iran has the means to punish Moscow on the ground, not only via its proxies on the ground in Syria but also in Iraq, should Moscow cross a redline on any of Tehran’s regional interests.  Iran has threatened that the United States would be mistaken if it thinks Iran would be the “only” country unable to export its oil. Most analysts took that threat to be alluding to Saudi Arabia, which is involved in proxy wars with Iran in multiple locations and whose oil industry has been subject to cyber, drone, and sabotage attacks. But Iran may also want to make sure that Putin knows Iranian proxies can make trouble for Russia (in addition to Saudi Arabia) if Tehran feels double crossed. Moscow could be finding that its “partnership” with Iran is double-edged, constraining its freedom of movement on a host of critical issues ranging from its ongoing operations in Syria to its desire to remain the senior partner in oil market management with Saudi Arabia. From the U.S. point of view, this is highly material to U.S. and Israeli hopes that Russia can be an effective partner. Any Russian promises to help with Syria’s border areas or oil markets could become subject to Iranian backlash and therefore not reliable. In other words, U.S. policy makers could overestimate the value of collaboration with Moscow on Middle East conflict resolution. For Russian oil companies, operations in special assignment regions like Iraq, Venezuela, Libya, and Iran come with extremely difficult operating environments. Local conflicts are disrupting oil production, limiting payments in kind (e.g. oil exports) that were expected to reimburse Russian firms like Lukoil and Rosneft for its massive capital outlays and manpower. Money spent in oil and gas fields in these far-flung places is capital not available to make steady and possibly more reliable profits in Russia’s own domestic oil and gas fields, and it remains to be seen if Russian firms would be able to hold onto the barter style deals, should the governments change in any of the troubled locales. When all is said and done, it remains to be seen whether in the hindsight of history, Vladimir Putin’s deal making in oil over the past year or so will be viewed as triumphantly as it now might appear. In the glare of Europe’s response, the sudden cutoff of Russian natural gas supplies to Ukraine back in 2006 proved a misstep by giving impetus to not only the installation of several major liquefied natural gas receiving terminals in southern Europe and Poland but also giving added stimulus towards a major push towards renewable energy on the continent. Russia’s current moves into troubled states could similarly come back to bite its oil and gas industry, which was already struggling from high indebtedness, limited access to future financing, and the threat of additional U.S. sanctions.

Navigating the geopolitical domain surrounding energy is always difficult, but in the lead-up to the U.S.-Russia summit in Helsinki, it is particularly complex. While energy is unlikely to be a first order item for the summit, a number of topics likely to be raised could intersect with energy issues. Senior Russian officials have been vocal about energy related items in the run-up to the July 16 meeting, perhaps hoping that recent oil market volatility will give Moscow a leg up to make the usual pitch about the positive role its energy trade can have in the bilateral relationship. Several energy related topics are likely front of mind for the American team traveling to Helsinki with U.S. President Donald Trump. Here are a few examples: 1. The United States would like Moscow’s help to restrain Iran’s expansive role in the Mideast because it believes that this would help U.S. regional allies and better enable the United States to exit costly conflicts in the region. The subject of the ongoing conflicts in Yemen and Syria is bound to come up at the summit, especially if the United States and Russia seek to open better lines of military to military communication between top U.S. and Russian military leaders. This consultative approach is considered critical to avoiding an accidental escalation of military conflict, the dangers of which have risen in recent years. For its part, Russia will argue it has offered some accommodation on the Iran issue and would like something back in return. First, Russia’s top diplomats announced Moscow wanted to see the withdrawal of all non-Syrian forces from Syria’s southern border areas. That move was taken as a betrayal by some in Iran where MPs accused Russia of being an unreliable partner that would willingly sacrifice Iran to bolster relations with the United States. Then Russia backed an agreement with Saudi Arabia and other oil producers including the Organization of Petroleum Exporting Countries (OPEC) to increase oil supplies. Iran was unhappy that Moscow showed its support for the oil producer agreement, especially given the context of the re-imposition of U.S. sanctions against Iranian oil export sales. President Trump made no secret that a Saudi-Russian agreement to raise oil production was the firm wish of the United States. But paving the way for the U.S. summit wasn’t likely the main reason Russia wanted to see oil prices stabilize at a lower level. Moscow had its own reasons to want to prevent a surge in oil prices. High oil prices make it harder for the Russian government to prevent ruble appreciation which would be bad for the Russian economy. 2. Arms control will be top of mind for the summit. The United States wants to signal its steadfast support for East Europe allies. This topic will trigger mutual accusations of violations in the Intermediate-Range Nuclear Forces Treaty (INF) treaty. While arms control will be a high priority topic, the back drop to any discussion of the INF and missile deployment will circle back to U.S. diplomatic support for Eastern Europe. That, in turn, could trigger a tangent to the United States’ open opposition to Russia’s Nordstream 2 direct natural gas pipeline expansion to Germany. Germany favors the expanded line to enhance its ability to bypass other gas pipeline transit countries like Poland, Belarus, or Ukraine, saying this will promote Germany’s energy security. The United States argues that the pipeline project, which would benefit Germany economically and strategically, could raise Europe’s dependence on Russian energy and weaken the Eastern European countries’ status vis-à-vis Russia as well as potentially shift needed income from the smaller Eastern European economies to to Germany. 3. The United States would like Russia to play a helpful role in negotiations for the denuclearization of North Korea. If past efforts are any indication, energy could be a piece of the economic package North Korea can hope to achieve through a peace treaty. Russia stands to be an important beneficiary of any energy deal that is part of the North Korean negotiations since one obvious option to North Korea’s energy problems could be a natural gas pipeline that would carry Russian natural gas via China to both North and South Korea. It’s not new for Russia to figure energy could be a constructive force to any U.S.-Russia relationship reset. Energy has been part and parcel of several U.S. attempts to improve relations with Russia in the past, as far back as 1993. At that time, the U.S.-Russia summit led to the creation of the Gore-Chernomyrdin Commission to promote economic and technological links, including energy. As part of that diplomatic process, the United States offered up American know how to help Russia revitalize its oil sector. ConocoPhillips was an early mover with its Polar Lights venture, but eventually it and other U.S. oil companies that entered Russia at the time found a host of legal, regulatory, and logistical barriers that turned profitable ventures into losing propositions. The failure of U.S. oil investing in Russia mirrored similar setbacks in U.S.-Russia arms control agreements. In the aftermath of the terrorist attacks of September 11, 2001, the United States and Russia revived their bilateral energy dialogues, after Vladimir Putin signaled that Russia was ready and able to help diversify global energy supplies away from the Middle East. In May 2002, President George W. Bush and President Putin initiated a new high-level dialogue on energy that led to several energy specific summits and new deals for American oil and gas companies in Russia. But soon after billions of dollars of fresh U.S. investment began flowing to Russia, the Kremlin began to renationalize its energy sector, and by 2005, U.S. companies not only faced difficult renegotiations of their oil and gas deals but in some cases, outright arrests of partners and the taking of assets. Obama era proposed resets similarly ran aground after Russia invaded Ukraine in 2014. The United States and Europe imposed sanctions on Russia in response, creating problems anew for the few U.S. oil companies that were still remaining on the ground in Russia. This time around, sanctions are top of mind when it comes to energy relations between the United States and Russia. Russian Energy Minister Alexander Novak visited U.S. Treasury Secretary Steven Mnuchin during his visit to Washington D.C. in late June. Reports say the meeting focused on sanctions, which for obvious reasons, the Russians would like removed, and the Nordstream 2 pipeline which Washington has threatened with possible new sanctions. Treasury, at the urging of Congress, has played a pivotal role in showing the Kremlin that it is not out of U.S. reach when it comes to economic levers. The United States targeted Russian aluminum firm Rusal and others with sanctions back in April to punish Moscow for malign activities, such as interference with U.S. elections, and amid suspicions that the Kremlin was behind the murderous use of nerve gas in the United Kingdom. The U.S. imposed April sanctions against Russia caused $12 billion in losses for Russia’s fifty wealthiest oligarchs. With both of Russia’s largest state-controlled energy companies, Rosneft and Gazprom, carrying huge corporate debt loads, further sanctions against those entities could be a major hassle for the Kremlin, which would be forced to intervene, possibly triggering more acrimony and rivalry inside President Putin’s inner circle.    From its side, Russia is likely to argue that it has been accommodating to U.S. priorities on Iran and oil prices and try to leverage those actions as evidence that the United States should offer concessions to its concerns. That means the United States will have to think carefully about how energy intersects with other priorities ahead of the summit because it will be tricky to both discourage Moscow from an aggressive posture on U.S. hacking, on military positioning in Eastern Europe, and on arms control and still reap the benefits of its cooperation in the Middle East and oil markets. Keeping items compartmentalized and in different buckets might seem feasible at first glance. The United States still achieved successful détente with the U.S.S.R. during the Cold War, for example. But as the U.S. summit with Russia approaches, better definition of priorities when it comes to energy will be necessary. Some items are already creating inconsistent messaging; for example, asking European nations to veto the Nordstream 2 pipeline to avoid over-dependence on Russia while at the same time, encouraging Russia to sell more oil to Europe to replace Iranian barrels and elsewhere to lubricate the oil market. Backing a Russian natural gas pipeline to the Korean peninsula could also seem untoward both to European advocates of Nordstream 2 as well as to U.S. exporters of American liquefied natural gas (LNG) who have been making headway lining up long term supply contracts to South Korea. The U.S. advance team to the summit will have to align competing interests to prepare more consistent messaging for Russia on these various energy elements, even if energy isn’t going to be in the top three topics for deeper discussion. Lack of clarity could muddy U.S. effectiveness in discussions or worse, leave Russia with geopolitical advantages it has shown it will exploit to divide the United States from its allies. Russia is likely hoping that energy exigencies will create an opening for it to gain concessions from the United States in other areas. The fantasy that Russia could somehow provide the United States a big lever against Iran in Syria and elsewhere may have initially clouded U.S. judgement over what is possible. Iran is unlikely to go quiet into the night, as it has made clear recently with threats against international shipping, regardless of how Moscow plays it. The United States needs to seek substantive discussion on other areas that don’t involve Iran, to avoid having the summit success reduced to empty promises on cooperation between the United States and Russia regarding Iran, when in reality, Moscow cannot likely impose sustainable constraints on Iran’s military actions, even if it wanted to. When discussing the topic of Europe, the United States should keep in mind China’s massive energy and other critical industry investment expansion into the continent. That could be a more fruitful topic that is putting Russian leaders on a back foot. To date, the real challenge to marketers of Russian oil and gas to Europe has not been U.S. LNG exports which are only just starting (U.S. energy sales to Europe are still a negligible volume compared right now to Russian natural gas sales which have been on the rise). It is renewable energy which is the bulwark of Europe’s energy independence from Russia. China could become the major actor in Europe’s clean energy future and that will influence both long run U.S. and Russian links to the continent as it has in Central Asia. The United States has been downplaying expectations for the Helsinki meeting, noting the fact that it is taking place is an improvement to escalating tensions. Preparations for a summit will likely force U.S. policy makers to square the circle on apparent inconsistencies in U.S. international energy diplomacy. Given the wary eye of Congress, the Trump administration is unlikely to offer Russia any sanctions relief until when and if Russia demonstrates substantive results on the ground. The United States should also be cautious about trying to orchestrate future participation of American oil and gas companies in Russia as a possible diplomatic carrot. The history of such initiatives is spotty at best, and it only takes one reckless unexpected action by Moscow to force Washington to press companies yet again to cut back on any progress on energy cooperation that could be made in the short run. A cautious approach to talk of energy cooperation would be wise at this juncture until more progress is made on higher priority issues.