Oil and Petroleum Products

It is often said, perhaps with some hyperbole, that Iran’s nuclear deal with world powers was the best hope for conflict resolution in the Middle East. Its architect John Kerry argues instead that the 2015 deal’s limited parameter of closing Iran’s pathway to a nuclear weapon is sufficient on the merits. The Trump administration is taking a different view, focusing on Iran’s escalating threats to U.S. allies Israel, Saudi Arabia, and the United Arab Emirates. Those threats, which have included missile, drone, and cyberattacks on Saudi oil facilities, are looming large over the global economy because they are squarely influencing the volatility of the price of oil. One could argue that the U.S. decision to withdraw from the Iranian deal, referred to as the Joint Comprehensive Plan of Action (JCPOA), has injected an even higher degree of risk into oil markets, where traders now feel that the chances of Mideast conflict resolution are lower. But, the Trump administration could argue otherwise. From its perspective, the United States extended to Iran $6 billion in frozen funds, opened the door for a flood of spare parts to be shipped into Iran’s suffering oil and petrochemical sector, and looked the other way while European companies rushed in for commercial deals. In exchange, it’s true, Iran began to implement the terms of JCPOA, but as Secretary of State Pompeo laid out in a major speech on the subject, the nuclear deal has failed to turn down the heat on the wide range of conflicts plaguing the Mideast region. Rather, Secretary Pompeo explained, Iran’s proxies have raised the stakes for U.S. allies, and regional conflicts have been dangerously escalating. U.S.-Iranian exchanges in Syria are also on the rise. The deal could still move forward, according to Secretary Pompeo, but not until Tehran addresses a laundry list of U.S. demands. Washington expects its action and rhetoric to spur more productive negotiations that would allow the United States to link restoring the nuclear deal with political negotiations to de-escalate conflicts. Since re-imposition of renewed oil sanctions doesn’t take hold for several months, wiggle room still exists for such diplomacy. But markets reflect doubt about those chances, reflecting the view of many respected commentators. Oil prices hit $80 a barrel and even the five-year forward oil price rose above $60 for the first time since the end of 2015. Speculators are still holding substantial long positions and industry has been slower to hedge, lest oil prices go higher still. In the world of oil, it’s hard to compartmentalize complex geopolitical conflicts. In condemning the Trump administration’s move, Iran’s hardliners actually accused the United States of withdrawing from the JCPOA to raise the price of oil and called on the Organization of Petroleum Exporting Countries (OPEC) to raise its production to resist the United States. In a tweet from the Iranian Oil ministry via @VezaratNaft on May 11, Iranian oil minister Bijan Namdar Zangemeh is quoted as saying “President Trump playing double game in oil market. Some OPEC members playing into U.S. hands. U.S. seeking to boost shale oil production.” Simultaneously, Iranian media promulgated a spurious rumor that Saudi leader Crown Prince Mohammed bin Salman had been assassinated. The context for both was dialogue between the United States and its regional Arab allies (kicked off by a Trumpian tweet on OPEC) on the need to cool off the overheated oil market with higher oil production to ensure that the re-imposition of sanctions did not destabilize markets further. In seeking “better terms” for the Iranian nuclear deal, the Trump administration is counting on the fact that the Iranian government faces more internal opposition from its population than it did when the deal was negotiated back in 2015. That popular discontent is palpable and explains why the Iranian rhetorical response to the U.S. withdrawal announcement has been relatively mild compared to historical precedents. But this is no cakewalk, since Iran is counting on Europe and other major trading partners to resist U.S. sanction efforts.   In recent years, China has established its own networks of financial channels and institutions that could be used to allow Chinese companies to pay Iran in its currency, the yuan, in a manner that avoids the Brussels-based SWIFT financial messaging system, which can be subject to U.S. tracking and intervention. China has already tested using the yuan to pay for imports from Russia and Iran via China National Petroleum Corporation’s Bank of Kunlun. The Tehran-based business daily The Financial Tribune suggested that other countries, including Europe, could tap “alternative Chinese financial networks.” But the practicalities of China taking the lead on behalf of Tehran when other U.S.-China bilateral trade issues loom large is more complicated now than it was back in 2012. In 2012, China agreed to meet the Obama administration’s request that it cut its Iranian imports by the minimum 20 percent. As robust a response as the United States may now say it wants from Beijing on Iran, Washington similarly has to consider other priorities on the table with China right now, including negotiations regarding North Korea. Iran has been exporting roughly two million barrels a day (b/d) of crude oil. Europe purchases over a quarter of that volume and is—if push comes to shove—likely to go along with U.S. policy if no diplomatic progress can be made. For now, European leaders are trying diplomacy to keep the nuclear deal alive separately from the United States and to press Iran to address some of the common concerns on Secretary Pompeo’s list. Back in 2012, Europe cut virtually all of its oil imports from Iran. Japan had already conservatively lowered its purchases from Iran in March and even India’s oil giant IOC is now saying publicly that it is looking for alternative barrels to replace its 140,000 b/d of purchases from Iran, suggesting the oil will be made available to India from Saudi Arabia. South Korea is also expected to wind down its purchases from Iran given the imperative to display common ground with the United States; Seoul has already reduced purchases from 360,000 b/d last year to 300,000 b/d more recently. In sum, although Iran can conduct oil for goods barters with Russia and Turkey, it could potentially lose one million b/d of sales or more, if it the current geopolitical stalemate stands. But more is at stake for Iran than short run oil sales since Tehran has learned it can get those back eventually if the political will towards sanctions wears off over time. The curtailment again of international investment in its natural gas industry is a bigger setback for Tehran, which needs natural gas not only to inject into its oil fields to drive production but also for residential and commercial use. If the United States manages to drive French firm Total back out of the important South Pars natural gas venture, the chances of Iran reestablishing itself as a major liquefied natural gas (LNG) exporter dissipates once again, possibly this time for decades given potential U.S. exports and other market conditions. China, which is also an investor in South Pars, does not have experience developing LNG exporting projects. Unfortunately, the global natural gas stakes could make it harder to draw Russia along with any U.S.-led conflict resolution effort. Even if Tehran was willing to cooperate in Syria or Yemen, Russia—a major natural gas exporter to Europe and Asia—benefits from U.S. sanctions that block competition from Iranian exports. Motivating the Kremlin into any diplomatic deal that restores U.S.-Iranian cooperation could be a heavy lift.   Russia is expected to begin supplying natural gas by pipeline to China via the Power of Siberia pipeline by late 2019 but Russia’s Gazprom has had difficulty locking down sales to China from additional pipeline routes. Successful negotiations on the Korean peninsula could help in that regard, since one potential fix to North Korea’s energy needs could be a Russian gas peace pipe. But the availability of direct natural gas exports to China and South Korea from the United States muddies the waters further. Beyond holding Iran out of the long run natural gas market, Russia could similarly be unwilling to agree to conflict resolution in Yemen and Syria because of the benefit it enjoys from keeping Saudi Arabia under financial and political pressure. Riyadh’s economic pressures, driven in part from its high military spending in Yemen, have made Saudi Arabia all the more willing to collaborate with Moscow on managing oil markets—a geopolitical reality that has strengthened Russia’s global standing significantly. It’s hard to see what would motivate the Kremlin to let Saudi Arabia off the hook given that a resumption of a tight alliance with Washington and Qatar is a material danger to Russia’s geopolitical and economic well-being, as demonstrated when the three countries collaborated in the early 2010s to weaken Moscow’s grip on European energy markets. Russia’s posture is not the only barrier, however, to conditions that would allow progress on U.S.-Iranian conflict resolution. Even if the economic penalty of the re-imposition of U.S. sanctions were sufficient to motivate Iran back to the negotiating table, it remains unclear to what extent Tehran can influence its own proxies who have independent goals that could not align fully with any conflict resolution deal Iran could strike with the United States and its allies. Moreover, it is similarly unclear whether the United States could draw Saudi Arabia into a workable political settlement for Yemen. Thus, while the United States could have a strategy in mind that could improve upon the status quo in the Middle East, a deeper dive into the energy realpolitik of the matter shows the complexities that stand in the way of progress. With so much at stake, an incredibly disciplined and patient hand will be necessary to work through the wide host of internecine, interconnected issues.  

For the seventh year in a row, Forbes has calculated that Aliko Dangote is Africa’s richest man, worth around $12.2 billion. He is also the only African that Bloomberg includes in its list of the world’s “fifty most influential people.” Yet, outside of business and financial circles, Dangote is not well known in the United States. Perhaps that is largely because his business interests—banking, cement, sugar, salt, agriculture, and manufacturing—are centered in Nigeria and Africa rather than overseas. He is currently expanding into fertilizer and oil refining. However, up to now, his wealth has not been based on oil production, nor is he involved in the information technology industry. Bloomberg describes him as “self-made.” While this appears technically to be accurate, Dangote comes from a wealthy Kano trading family and an uncle provided him with start-up capital. Like other members of his family, he primarily traded commodities in the beginning of his career, but shifted to manufacturing in 1999 with a focus on providing basic products and the building blocks needed by Nigeria’s huge population. In an interview with Bloomberg, he seems to be proud of his risk-taking, which appears successful. According to Bloomberg, Dangote’s publicly traded companies provide about one-third of the market capitalization of the Lagos Stock Exchange.  Dangote is a practicing Muslim and uses the title of “Al Haji,” reflecting the fact that he has made the pilgrimage to Mecca and Medina. However, there is no evidence of religious fanaticism of any sort, and he employs Nigerian Christians at all levels in his enterprises. He is a graduate of Al-Azhar University in Cairo. He prides himself on being quiet and low key. According to various Nigerian websites, he has been married and divorced several times and has many children. Despite his seemingly austere image, the Nigerian media reports that he has a private jet, a yacht, and a fleet of luxury cars. Pictures of his primary residence in Abuja show a mansion in the style of an American plutocrat of the Gilded Age before the First World War. Nevertheless, unlike other African plutocrats, he does not appear to own luxury property outside of Nigeria, such as in the plutocratic favorites of London, New York, or Marbella. He also has established a philanthropic foundation and has pledged $500 million over five years to address malnutrition in Nigeria.  While Dangote expresses little interest in politics, in Nigeria as in much of the developing world, politics and big business overlap. The Nigerian media states that he provided significant financial support for Olusegun Obasanjo’s presidential election campaigns while the latter was chief of state and for the People’s Democratic Party (now the opposition party), though whether that continues is unclear. The bottom lines would appear to be that Dangote’s empire-building resembles that of the great American industrialists before World War I. Dangote himself expresses admiration for them. There is little question that he is a powerful force for the diversification of Nigeria’s economy away from oil and gas, a necessary transition if the country is to develop economically.  

This post is co-written by David R. Mares, the Institute of the Americas chair for Inter-American Affairs and professor for political science at the University of California San Diego and the Baker Institute scholar for Latin American energy studies at the James A. Baker III Institute for Public Policy at Rice University. Venezuelans are due to go to the polls on May 20, in an election that is seen as problematical for the largest members of the Organization of American States (OAS). Last month’s OAS summit was inconclusive on how to respond to the deepening humanitarian crisis inside Venezuela that has spurred 230,000 refugees to cross the border to Colombia and oil workers to abandon their posts. This week’s news included an announcement that Chevron was withdrawing executives in light of the arrest of two company employees who were arrested for refusing to participate in official corruption. Chevron’s announcement follows the exit of major U.S. oil drilling service companies. Oil production from areas such as Chevron’s operations were a bright light in a rapidly declining sector. As the Venezuelan oil industry collapse accelerates under the rule of Major General Manuel Quevedo, oil production is likely to continue to crater, perhaps at a faster rate. Eventually, the industry’s performance will be so debilitated that it will render the option of U.S. sanctions against Venezuelan oil exports less relevant.   The prospects that General Quevedo will run Venezuela’s oil industry into the ground raises the specter that the ranks of the country’s military could consider a coup against President Nicolas Maduro. That will present a different kind of challenge for the United States and the OAS.  Opening Pandora’s Box – Again? The U.S. government’s response to Venezuela’s situation will complicate a broader Latin American response. Former President Barack Obama’s designation of Venezuela as a threat to U.S. national security alienated most of Latin America with its harkening back to Cold War unilateralism. The recent thinly veiled calls by high U.S. officials including Senator Marco Rubio—chairman of the subcommittee on the Western hemisphere—for a military coup to oust President Maduro raises fears of a return to Latin American militaries as the arbiters of politics. The fact that some members of the Venezuelan political opposition also support the call for the country’s military to intervene is also troubling, as significant minority opinions in Latin America’s past supported military coups that were followed by severe repression and suspended democracy for years. A Checkered History of Efforts to Defend Democracy in Latin America  Latin America has committed itself in multiple international fora to defending democracy. In the twenty-first century they have acted in concert multiple times to isolate governments that came to power through irregular or highly questionable means (e.g., Venezuela 2002 and Honduras 2009) or to effectively mediate government-opposition conflicts (e.g., Bolivia 2007-2008). But today Latin America is divided regarding how to respond to the political, economic, and humanitarian crisis engulfing Venezuela. The Lima Group of fourteen countries (including Canada, Guyana, and Saint Lucia as non-Latin American members) is pressuring the government of Nicolás Maduro for credible commitments to free elections and reforms, but several members of the OAS call for a hands off approach. Even the Lima Group is divided regarding how much to pressure Maduro: Peru told Maduro that he was not invited to the 2018 Summit of the Americas, but Chile publicly stated that all governments were invited to the inauguration of President Sebastián Piñera. The reasons for this disunity are not simply ideological disagreements, dependence on Venezuelan oil, or kowtowing to Washington. Rather, they are rooted in the region’s history of political instability, frustrated social change, and experience with the heavy and clumsy hand of the United States, all of which have led to the region prizing sovereignty and generally opposing interference by other nations in domestic affairs. Drawing the Line - Where? OAS leadership, both the current Secretary General Luis Almagro and the former Secretary General Jose Miguel Insulza, have sought to make the organization live up to its responsibilities under the 2001 Inter-American Democratic Charter, and to critique the intransigence of the Maduro government. The United States, Brazil, Colombia, and Argentina all supported this approach at the OAS summit last month in Lima.  But the OAS has not been effective in delivering a clear and consistent pro-democratic message for complex reasons. First, there is no agreement in Latin America beyond periodic elections on what constitutes “democracy,” and therefore it is diplomatically difficult to get agreement on where the Maduro government sits on the spectrum where beyond which politics is no longer democratic. Second, the great discrepancies in political and social inclusion that remain in Latin America reproduce the domestic political polarization and instability at the regional level. Populist governments in Ecuador and Nicaragua still support the Venezuelan government.  Worse still, Latin American governments agree that if the military participates in an overthrow—even if asked by governing institutions to do so (e.g., Honduras)—that it is a coup against democracy. But if riots in the street seek to force a president to resign and thus impose the vocal minority’s will over the results of elections, Latin American consensus breaks down with governments that favor the opposition calling for mediation and those sympathetic to the government supporting the electoral calendar. Similar divisions reveal themselves when one branch of government uses its constitutional powers to remove the leadership of another branch or stop a proposed policy (e.g., Paraguay, Brazil, Venezuela in 2015). This pattern suggests that Latin America’s defense of democracy is not a mature process tied to law and institutions, but still rooted in individuals, ideology, and politics. Looking for Clean Hands Who has the standing to critique Venezuela? Maduro’s popularity in Venezuela is far greater than President Michel Temer’s in Brazil where few voters likely believe that Temer and his administration are more honest than Luiz Inácio Lula da Silva or Dilma Rousseff who are under investigation. Among the mediators selected by the opposition is Mexico—a country with the highest murder rate for journalists, where the government is suspected by international NGOs of being involved in much of the violence against citizens and wallowing in corruption. Colombia is one of the leading voices for sanctioning Venezuela’s government, but Colombia’s bona fides are compromised by the fraying of the peace agreement and the lack of security for FARC candidates in elections. Peru’s President just resigned in the face of serious financial and political corruption scandals.  All this makes the U.S. decision making about Venezuela extremely difficult. If the goal of U.S. intervention is to restore democracy to Venezuela, imposing U.S. sanctions against the country’s oil exports could be overkill, given the decline coming to the country’s oil sector in any case. Targeted sanctions against the Venezuelan military would have limited real effects given Russia and China’s commitment to the current regime and would only reinforce officers who hold anti-U.S. nationalist views. The U.S. government should consider two major points in preparing for the next stages in the evolution of the Venezuelan crisis. First, if the United States is seen as taking the lead in bringing about the collapse of the Maduro government, it will discredit the democratic transition in the eyes of significant segments of Venezuelan and Latin American public opinion. Secondly, United States credibility for providing reconstruction aid and supporting an open and non-discriminatory transition process is low in the region.  With these points in mind, there are some efforts the United States could make in a supporting role to the Lima Group. Colombia has called for a reconstruction plan for Venezuela; the United States should encourage a Latin American conference to develop that plan with clear U.S. commitments. The United States also needs to adopt an active and visible role assisting Brazil and Colombia to deal with the refugees. This would not only be in line with U.S. disaster relief efforts in the past but could constitute a way of getting humanitarian aid to Venezuela, bypassing the government, if enough aid is provided by the United States, the Lima Group, and the EU to enable people to bring some back into Venezuela. While not the ideal means to provide humanitarian aid inside Venezuela, smuggling is a well-established activity and effectively closing the border to the influx of such aid would significantly add to the discredit of the Maduro government. The United States also needs to consider how it would respond to a sudden military take-over and change of leadership. In this case, the United States should coordinate with Latin American governments in an immediate call for a firm date for the restoration of freely organized elections and in which chavismo, minus government officials implicated in corruption and abuse of power, would be free to compete. Only a stable democratic Venezuela will be able to utilize its vast oil and gas resources for the benefit of its people and global energy markets.

This is a guest post by Isidro Morales, a professor of the School of Government at Tecnológico de Monterrey, Santa Fe (Mexico City) campus. On Sunday April 22, the first of three presidential debates took place in Mexico City, gathering the five candidates out of which three are sponsored by their respective political parties, and two are running as independent contenders. Slightly more than two months ahead of election day on July 1, polling indicates the choice will be between Andrés Manuel López Obrador and Ricardo Anaya Cortés. López Obrador is sponsored by Morena, the political party he founded himself, in coalition with two other parties, the center-left Partido del Trabajo (PT) and the center-right Partido Encuentro Social (PES). Anaya is supported by the center-right Partido Acción Nacional (PAN), in coalition with two center-left parties, Partido de la Revolución Democrática (PRD) and Movimiento Ciudadano. A few days before the first debate took place, Reforma, a Mexican leading newspaper, published a poll showing a major lead by López Obrador on electoral preferences: 48 percent, while Anaya held 23 percent of the preferences and Jose Antonio Meade, the Partido Revolucionario Institucional (PRI) candidate, only 14 percent. The polarization in voting preferences is not surprising. López Obrador has been successful in exploiting the frustration and disaffection of most parts of the Mexican population against the PRI, the party which lost the presidential election in 2000 after ruling Mexico for more than seventy years and which came back to power in 2012, with Enrique Peña, whose presidential term became highly disappointing. Indeed, the presidential election of July 1, will take place in a country in which public safety is fragile, political corruption is widespread (various PRI’s former governors are either prosecuted or law fugitives), and NAFTA is being renegotiated with uncertain outcomes. The backdrop on energy issues is that oil production continues to fall while gasoline prices increase, in spite of a major energy reform which opened to private participation (national and foreign) to all production chains of the industry. The first presidential debate did not cover the energy issue, which is slated for later sessions focused on economic issues. However, the energy reforms have not been successful enough to help the PRI with its reelection. With a historically low record of popularity reached by Peña’s administration, it looks difficult for Meade, the current PRI candidate. In spite of his good record as a public administrator, he seems unlikely to narrow the gap he still has vis-à-vis Anaya. Despite the widely touted energy reforms, the Mexican oil industry still faces a host of challenges, not the least of which is increasing theft and violence against oil facilities that have endangered the lives of oil workers. Announcements to begin developing Mexico’s vast shale resources in the state of Tamaulipas have also been greeted with some skepticism since the region is dominated by the Zetas and Gulf drug cartels and it is unclear how the government would address any security issues that could plague drillers.     While the margin is still large between López Obrador and Anaya, it could eventually be narrowed and eventually reversed, depending on how electors scatter their choices among the independent runners, and how the two major contenders attract or disappoint their respective constituencies. The outcome of the first debate, for example, seems to have played to the benefit of Anaya, at least this is what another survey published by Reforma shows slightly after the debate was over, including the opinion of leading voices from academia, politics, business, and civil society. Indeed, López Obrador was vague on critical issues during the debate while Anaya was assertive and specific in his attacks regarding important proposals and against some controversial members included in Lopez Obrador’s party (i.e., Manuel Barlett, blamed for being the orchestrator of an electoral fraud favoring the PRI during the 1988 elections, when he was Secretary of Government). Two contentious issues of the debate are particularly salient to Mexican voters. The first one is the amnesty previously announced, while campaigning, by López Obrador to Mexican drug barons in case he becomes president, as a means to end the “war on drugs” initiated by former president Felipe Calderón, in 2006. Anaya and most of the other candidates have rejected this possibility, highly sensitive in a country in which more than 120,000 people have lost their lives since the armed confrontation against drug traffickers started. During the debate, Anaya confronted his rival on the issue, asking him whether he continues to support the amnesty. López Obrador rather provided for a diffuse answer, suggesting that organized crime activities is the result of social and economic conditions prevailing in the country, and that the final decision will be taken after consulting a group of experts. The second hot confrontation in the debate was on the means for making more transparent and accountable Mexico’s public policy, including the performance of the Presidency. Anaya was clear in advancing his proposal for creating an independent prosecutor, elected not by the president in power (as it is currently the case) but by the congress, with the mandate to prosecute the corruption of public officials, including the president. According to rules still prevailing in the country, the president cannot be impeached, unless there is an alleged cause of “treason to the Nation”. The proposed change would make impeachment by mismanagement possible for all public officials, if the Mexican Constitution is changed and an independent prosecutor is established. By contrast, López Obrador calls for abating corruption and tackling government accountancy by putting himself as the model of good governance when he arrives to the presidency. He promises to rule with austerity and transparency, by emulating the political and social performance of past national heroes—such as Benito Juárez, the president who repelled a French intervention; Francisco Madero, the president who restored democracy after the fall of the Diaz dictatorship; and Lázaro Cárdenas, the president who nationalized the oil industry in 1938—and putting in place a sort of referendum, every two years, in order to ask the electorate whether the president should continue in power or step down. The first debate also revolved around security and political issues, while coming debates will deal with economic, social, and foreign policy aspects. However, the electorate is already anxious to know, whether López Obrador will remain vague and diffuse as he was in this first debate, concerning other controversial issues of his campaign. A critical question is his ultimate position on the reversal of the energy reform incepted by the current administration, which needed a constitutional amendment requiring at least two thirds of the votes of the legislators and the support of at least half of the state congresses. According to Alfonso Romo, the would-be chief of staff in the case that López Obrador becomes president, the reform will remain in place and contracts signed by the current administration with private companies will not be cancelled. However, according to Rocío Nahle, current leader of Morena in the Chamber of Deputies, and potential secretary of energy if López Obrador becomes president, the reform could be revisited and private contracts cancelled in case evidence of corruption is found. Will López Obrador call for a group of experts once he is in power in order to decide the future of his energy policy, as he said he will do for confronting organized crime? If he does, how will the group of experts be formed? It is up to López Obrador and his team to clarify their position in this hot issue during the following two months of the presidential campaign. If the ambiguity is maintained, López Obrador risks losing part of his constituency to the benefit of the rest of the candidates.

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.    

Years ago, Wanda Jablonski, the famous energy journalist and newsletter publisher, gave me an important piece of professional advice. Be careful how many conflicts you take on at one time.  Wanda’s admonition was intended to instruct me about how to be effective within the complex oil politics of the Middle East. But lately, I have been reminded of her wise counsel as I read the news. The Trump administration should heed her words in deliberating on the vast array of trade and oil sanctions issues that need to be considered by the White House. While it is true that chances are any individual policy that could affect oil and gas trade can be accommodated easily by markets, it could be a different calculation to impose multiple policies all at once. Oil markets are watching closely all of the various energy related trade and sanctions policies on the table. Right now, any tightening of oil sanctions against Iran are viewed as the most impactful upside market risk, with the U.S.-China trade war swinging sentiment in the opposite direction.    U.S. oil and gas exports are on the rise and that has been good for the United States geopolitically. U.S. energy exports help promote American influence while at the same time reducing the U.S. trade deficit. So far this year, U.S. energy exports have exceeded expectations and that is paving the way for some beneficial outcomes. Besides serving as a bulwark against Russian manipulation and Mideast supply disruptions, greater availability of U.S. oil and gas could make it easier to convince European countries they can afford to agree to renewed sanctions on Iran. They also up the pressure on Russia’s oligarchs by potentially shrinking the pie they have to split. One could even argue that rising U.S. shale production is playing a role in convincing Saudi Arabia’s new leaders to institute needed social and economic reforms by creating uncertainty about long run oil prices. In another example, high U.S. oil refinery exports are replacing lost Venezuelan refined products. This could pave the way for United States regional diplomacy, should it make greater efforts, to gain more support within the Organization of American States (OAS) to isolate the Maduro government, which is no longer in a position to provide finance or free oil to Caribbean and Central American countries. Right now, OAS Secretary General Luis Almagro has expressed support for a case against Venezuela’s leader Nicolas Maduro for “crimes against humanity” before the international criminal court in the Hague. Perhaps in time, as the lingering effect of Venezuela’s defunct Petrocaribe oil aid program fades however, OAS could be able to reach a majority decision to declare foul on Venezuela’s actions to dismantle its democracy and thereby strengthen diplomatic pressure on Caracas.  The United States should add stronger diplomatic effort in this direction, before it resorts to unilateral oil sanctions on Venezuela. Banning sales of U.S. tight oil to Venezuela should be used as a last resort measure only. That’s because the whole concept of U.S. energy “dominance” is based on the diplomatic gain that comes from the U.S. reputation as a pivotal free market oil and gas supplier that would never cut off another nation. Albeit Venezuela could be considered a situation that is sui generis given the humanitarian suffering of the Venezuelan people, but some international backing from OAS or the United Nations would give the United States better standing with other buyers for imposing restrictions on U.S. tight oil exports to Caracas. The United States is well positioned to leverage that fact that U.S. exports of refined products are supplying Latin America and the Caribbean in the face of the decimation of the Venezuelan refining industry, which was rumored last month to be about to indefinitely shutter three of the country’s four largest refinery complexes.      In addition to mooting sanctions against Venezuela, 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 announced terms which reduces the number of Iran’s centrifuges and limit the level of uranium enrichment to 3.67 percent, far below weapons grade, for 15 years. Under the deal, Iran is tasked to remove the core of its heavy-water reactor at Arak, capable of producing spent fuel that can yield plutonium. The Saudi crown prince told the New York Times that “Delaying it and watching them getting that bomb, that means you are waiting for the bullet to reach your head.” 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 and the Saudi diplomatic strategy regarding Iran could press the kingdom to offer to replace Iranian oil that would be lost to buyers during any re-imposition of oil sanctions against Iran. Iran has had increased difficulty marketing its oil in recent weeks, 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.  Any U.S. moves on Iran will have to be taken in the context of the desire to take similar moves against Venezuela, which like Iran exports heavy crude oil (in contrast with rising U.S. production, which is of a different lighter quality). The U.S. strategic petroleum reserve has some heavy crude oil stored in its caverns. Worst comes to worst, a loan to a particular U.S. refiner hard hit by sanctions could be made.  The U.S.-China trade negotiations are yet another backdrop to U.S. energy issues to consider. As a recent Citi brief to clients notes on the latter, it is “clear that energy specific trade with China continues to improve in the U.S. favor.” The bank’s rough estimate is that the U.S.-China net oil export balance rose from +$2.8 billion in 2016 to +$8.2 billion last year and could reach $11 billion in 2018 if January trends can be sustained. This trade has implications for the direction of the U.S.-China trade balance that will need to be kept in mind by the Trump trade team.  But the complexities go beyond oil, U.S. exports of liquefied natural gas (LNG) are also finding a profitable opportunity window in the global market based on higher than anticipated demand from China, South Korea, and Taiwan, aided by economic growth and new policies aimed to reduce coal use and fight air pollution across Asia.  As it accelerated its policies to promote coal-to-gas switching, China’s LNG imports rose almost 50 percent in 2017 and have continued to be strong this winter, including purchases of six cargoes via the U.S. LNG export terminal at Sabine Pass. South Korea surpassed Mexico as the largest buyer of U.S. LNG in the first quarter of 2018, and a boost in the long run appetite from South Korea for LNG is expected, given President Moon Jae-in’s pledge to curb use of coal and nuclear in favor of cleaner, cheaper renewables and natural gas.  In other words, growing U.S. LNG exports intersect with several ongoing trade negotiations, namely with China, Mexico, and South Korea. S&P Global Platts is forecasting U.S. LNG exports to increase by 8.1 billion cubic feet per day (bcf/d) by 2020 and another 4.9 bcf/d by 2025, a factor that needs to be considered in trade negotiations. Sales to Mexico are particularly important for the Permian Basin, where excess natural gas is already being flared at high levels.    China’s threat to impose a 25 percent additional tariff on U.S. propane (which is an important component of the liquefied petroleum gas or LPG used in Asia as a residential heating and cooking fuel and as a feedstock to China’s growing petrochemical industry) won’t affect U.S. propane producers all that much. That’s because the largely fungible commodity will be sold elsewhere, with rising supply from Iran and Australia likely to replace the U.S. LPG in China, along with other Middle East supplies. As that shift takes place, U.S. sellers will shift to non-Chinese buyers.  The bottom line is that markets will likely still rebalance in the wake of turmoil created in the coming weeks from any disruptive new trade and sanctions policies, leaving it a little less clear whether prices are facing headwinds or tailwinds. For U.S. energy dominance, it could also be a mixed bag, with commercial availability of U.S. oil and gas only part of the equation. As the upcoming events could show, even fully free market oriented production can face a geopolitical context in a world in disarray.    

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.

During last week’s international energy industry gathering in Houston, CERA Week, U.S. Secretary of Energy Rick Perry introduced a new buzzword for the Trump administration’s energy policy: “energy realism.” 

Laundering money by purchasing real estate in foreign countries is an old song. The wealthiest parts of London and New York are filled with expensive houses and apartments, respectively, that are apparently unoccupied by their foreign owners most of the time. Mayfair and Belgravia in London and midtown Manhattan are especially popular. In Manhattan, One57, located at 157 West 57th Street, is one of the most notorious of the supertalls, apartment houses more than one thousand feet high. It includes the most expensive apartment ever sold in New York, at a price of $100.5 million in 2014. New York law makes it easy for purchasers of expensive real estate to be anonymous, making properties in the city attractive to foreigners living in unstable countries who wish to protect or launder their assets. Kolawole Akanni Aluko, a former executive director of Atlantic Energy, was the owner of a 6,240-square foot apartment on the 79th floor of One57 that he reportedly purchased for just over $50 million. The formal owner, apparently, was a shell company that he controlled. As collateral for a mortgage, Aluko used his $80 million yacht, which he reportedly rented to rapper Jay-Z and singer Beyoncé at a rate of $900,000 per week. Subsequently, he defaulted on a mortgage of $35.3 million to a Luxembourg bank. In foreclosure, the apartment was sold at auction in 2017 for $36 million, a decline of 29 percent in the purchase price. Aluko and others are under investigation in Nigeria, the United Kingdom, and the United States for, among other things, bribing the Nigerian oil minister at the time, Diezani Alison-Madueke, for lucrative government contracts. Alison-Madueke is also under investigation. Aluko has reportedly disappeared on his yacht and is thought to be somewhere in the Caribbean. For its part, the U.S. Department of Justice has filed a civil complaint seeking the forfeiture and recovery of $144 million in assets related to the alleged bribery of Alison-Madueke by Aluko and others. Oil and gas are the property of the Nigerian state. They are exploited through joint ventures and agreements between the state and oil companies. Oil production is normally about two million barrels per day. Yet more than half of Nigeria’s population lives in poverty. Popular resentment at corruption of the magnitude alleged with respect to Aluko was an important factor in the presidential victory of Muhammadu Buhari in 2015, and drives his anti-corruption campaign. For more insight into One57, see this article by the New York Times that chronicles a reporter’s over-night stay.   

As senior officials from the Organization of Petroleum Exporting Countries (OPEC) gather in Houston for the international industry gathering CERA Week, they will be listening carefully to speeches by the CEOs of the largest U.S. independent oil companies about the prospects for the rise in U.S. production in 2018 and 2019. Likely, they won’t like what they hear. U.S. industry leaders are saying U.S. shale production could add another one million barrels per day (b/d) or more on top of already substantial increases, if oil prices remain stable. Best C-suite guesses from Texas are that a sustained $50 to $60 oil price could result in a fifteen million b/d mark for U.S. production in the 2020s, up from ten million b/d currently. U.S. shale’s capacity to surprise to the upside is likely to leave OPEC producers with some soul searching to do as they consider their strategy for the second half of the year and beyond. OPEC has received some unexpected help to make space for rising Iraqi and U.S. oil exports from the sudden collapse of Venezuela’s oil industry where workers, faint from lack of food, are abandoning their posts to emigrate or worse to sell stolen pipes and wires to make ends meet for their families. Energy Intelligence Group is reporting this week that Venezuela’s oil production has fallen to 1.4 million b/d last month, down from 1.8 million b/d just last autumn. But ironically, a further collapse of Venezuela’s oil industry could make OPEC’s deliberations harder, not easier, if it ruptures the conviction of the current output reduction sharing coalition. If too many Venezuelan oil workers abandon their posts at once out of desperation, the country’s fate could more closely mirror Iran in 1979 when a crippling oil worker’s strike brought Iranian oil exports to zero and rendered the Shah’s rule untenable. The U.S. also continues to mull additional sanctions against Venezuela, including oil trade related restrictions, to pressure Caracas to restore democratic processes inside its borders. Trading with state owned PDVSA is becoming more difficult but Venezuela has been using U.S. tight oil as a diluent for its heavy oil. Historically, during many past oil disruptions, OPEC’s Arab members like Saudi Arabia and Kuwait have increased exports to prevent oil prices from skyrocketing. Kuwait especially is likely to argue that will be necessary to keep oil prices from going too high since it is keenly aware that the high prices of the early 2010s were exactly what stimulated the very U.S. shale oil investment and energy efficiency technologies that are plaguing the long run outlook for OPEC oil today. Studies on how digitization of mobility can eliminate oil use has led many organizations, including some large oil companies, to speculate that oil demand could peak sometime after 2030. The argument that the OPEC cuts need to be abandoned sooner rather than later could also sit well with Russia’s oil oligarchs who have been unhappy to see continued cooperation with OPEC that has left some one to two million b/d of potential Russian projects on hold. But Saudi Arabia could worry that a premature relaxing of the “super” OPEC coalition agreement could bring prices lower than the $70 it is targeting to keep its domestic spending on track and to position state oil firm Saudi Aramco for a successful five percent initial public offering (IPO) sale. It has been seeking a long lasting condominium with Russia to prevent a return to destabilizing competition for market share. Expanding U.S. exports have eaten away at Mideast sales to Asia. Russia is also looking to sell more oil and gas eastwards. All this leaves OPEC (and its partnership with Russia) in a quandary. Traditionally, OPEC’s Gulf cooperation council members, Saudi Arabia, Kuwait and the United Arab Emirates have made extra investments to carry spare capacity to respond to sudden supply shocks and/or to punish usurpers who could challenge OPEC for market share. But in the age of U.S. oil abundance, OPEC’s Gulf members are questioning whether this approach continues to make sense. In a world where peak oil demand is being mooted, will “the shareholder” (eg ruling royal governments) order national oil companies to spend billions of dollars to develop new spare capacity, even if it could not be needed? But if producers fail to make those investments and oil prices ratchet up to extremely lofty levels, can that propel a faster acceleration to low carbon electric cars, shared mobility services, and oil saving devices, hurting those very same oil producers even more harshly in the long run? China is clearly positioning itself to take advantage of such an eventuality with a multi-trillion dollar industrial export policy for renewables and clean tech of its own making. The overall uncertain situation has led to some incoherent commentary by OPEC leaders. On the one hand, some leaders talk about the global oil field three percent decline rate in near hysterical terms as potentially leading to an epic supply crisis in the coming years. They cite this risk as a reason to keep oil prices high. On the other hand, even as they sound that alarm, they are not willing to bet with their own pocketbooks on making major investments to plug that supposed hole. The alternative option for OPEC to restart the price war seems equally toothless, especially if those flooding the market do not appear to be able to survive the sustained revenue drop to make it an effective threat. Citi projects that even with expected declines in production in certain non-OPEC producing countries, continued increases from Brazil, Canada, Africa, and global natural gas liquids will overwhelm losses elsewhere, even without a higher than expected contribution from U.S. shale, assuming geopolitical events don’t create an unexpected cutoff of a major producer. It is in this context of confusion that the United States needs to consider the dangers of altering a suite of energy policies that are working. The United States is well positioned to supply individual U.S. refiners with heavy crude from the Strategic Petroleum Reserve (SPR), should it find that new sanctions or internal strife means those refiners have to abandon Venezuelan heavy oil imports. In other words, the SPR is not superfluous. Corporate efficiency standards for U.S. cars help constrain U.S. domestic oil use, freeing up U.S. refined products and crude oil for export and enhancing the role of U.S. energy production to constrain OPEC and Russian market power. Free trade agreements with Canada and Mexico are ensuring a strong nearby pipeline market for rising U.S. surpluses of natural gas. U.S. assistance for its clean tech industry prevents China from monopolizing benefits that can come to an economy when higher oil prices prompt countries to shift more quickly to energy saving technologies and renewable energy. The Trump administration needs to slow down in busting with tradition when it comes to energy. Some of the tried and true policies of the past are contributing to this administration’s mantra of energy dominance. They need to focus on the old saying “If it ain’t broken, don’t fix it.”