The recent drone attacks, attributed to Iran-backed Houthi rebels, against oil infrastructure facilities in Saudi Arabia have triggered another rally in global oil prices. Even though POTUS has promptly made a reassuring announcement trying to confine extreme market reactions the overall sentiment remains highly volatile. The latest developments bring forward once again the crucial matter of the correlation between the energy markets and geopolitics. Apparently we are standing nowhere close to the fragile environment that dominated the energy scene during the 1970s and 1980s and obviously the US resiliency against a potential cut-down in the oil supply from OPEC is undoubted, compared to those days; however there is still a lasting element from this era and this is the impact of geopolitical tensions on the oil and gas industry, alongside the role of energy resources as a tool to achieve political ends worldwide. The energy industry has ultimately been affecting the US foreign policy and how developments of the last decade have reshaped the previous status quo.
JCPOA and Iran
With Iran being the talk of the day, it is worth having a look into how JCPOA -and the following US withdrawal- has impacted the oil market. The country holds a prominent role in the global energy sector, standing third among OPEC members when it comes to proven oil reserves. Undoubtedly Iran’s economy has been tightly relevant to the energy markets. The signing of JCPOA back in July 2015 has been a decisive factor to send and keep the oil prices in historic lows until the US withdrawal from the agreement on May 2018. As discussed in a previous article, the Trump administration is focusing on weakening the US rivals worldwide through a combination of diplomatic means and economic sanctions rather than dragging the country in a costly and politically damaging wide-scale military campaign.
Through the reinforcement of the sanctions, the States aim to strangle Iran financially, to reach the point, where president Rouhani -or his successor- would be eager to sit at the negotiation table, without being in the position to efficiently negotiate. The longer the sanctions stay in place the more difficult it will be for Tehran to manage its domestic affairs and maintain its international standing. Opportunistic reactions should be anticipated by the Islamic Republic, both through its proxy powers in the region and by taking unilateral action against Western interests focusing on the harassment of military assets and shipping industry. However extreme measures, that could be perceived as casus belli, like the closure of Straits of Hormuz, are highly unlikely since both sides want to avoid a full-scale confrontation.
This US approach is two-fold; Washington undoubtedly seeks to restraint the regional influence of Tehran, since it is perceived as a destabilizing power in the Middle East and a permanent threat to the US strategic partners, KSA and Israel. Iran allies, like the Houthis in Yemen and Hezbollah in Lebanon -and Syria- pose major challenges to the US interests and the Trump administration comprehends, that by minimizing Iranian logistical and operational support to such groups, their tactical and strategic capabilities will be significantly downgraded. On the other hand, the top priority for President Trump, to capitalize politically and secure his reelection, is to boost the US economy and self-sufficiency during his first term. The ensuing soar in oil prices, following the US withdrawal from JCPOA, created positive circumstances for the US shale oil industry, as will be thoroughly examined below.
Geopolitical Implications of US oil imports
For the last few decades the dependency of the US industry and eventually US economy per se, on the major oil-producing countries of the Gulf, has been unquestionable. Therefore, Washington had to adjust the US overseas policy following this reality, seeking to build a modus vivendi with those powers, even when this seemed rather controversial.
For instance, the States have been traditionally implementing an Israeli-friendly strategy in the region, identifying common interests with Tel Aviv and pursuing to secure the preservation of a small state surrounded by perceived hostile nations. Given the crucial role of religious politics in the past Arab-Israeli wars and ongoing disputes, it is questionable how Saudi Arabia -the gatekeeper and guardian of the Muslim world- or the rich gulf monarchies have not been heavily involved in those conflicts and in the same time managed to sustain a friendly relationship with the US. A closer look though indicates that the Saudis were quick to understand that the prosperity of their nation was based upon the establishment and maintenance of friendly relations with one of their top oil buyers. Accordingly, American Presidents could easily realize that KSA has been a critical factor of stability in the region and a reliable business partner, thus it wasn’t too hard for them to oversee some in-country -but internationally addressed- human right violations, that in other cases could lead to a major US backlash.
On the other hand, oil-producing countries that followed a rather unpredictable and dubious -domestic or foreign- policy, with leaders that could not be trustworthy counterparts, would make the US feel quite uncomfortable. In such cases, Washington would either encourage and indirectly support a popular uprising leading to a regime change, or directly campaign against that country. The most indicative instances of this approach have been Libya and Iraq respectively.
US shale oil industry and Trump Presidency, as Game Changers
We have described just now some of the dynamics that shaped the US policy-making process for the last half-century. The tables have turned though during the last decade because of two seemingly different but essentially related developments; the massive expansion of US shale industry and the election of Donald J. Trump, as the 45th President of the United States.
The potential exploitation of shale oil is not something new in the US. The commonly referred today method of fracking has been known since the late 1940s. But it took almost 30 years until this technique has been utilized to extract shale oil in Odessa, Austin, San Antonio and other places in Texas, close to the Mexican border; and it wasn’t until the late 2000s when the method of hydraulic fracturing has finally evolved to the point that could be widely used and became an economically viable option to extract oil.
From that moment US shale and gas production has soared. The US production in the energy sector has put the States in the top of the oil-producing countries overlapping major powers of the OPEC block. But as mentioned above to make this sector profitable US want to keep the oil prices steady and avoid any sharp decreases on the value of the commodity. Therefore, the withdrawal from JCPOA, the ongoing tension of the last decade in the Middle East and the reaction of the energy markets have created the ideal context for US shale producers.
Now let’s examine this soar in shale oil production concerning the current US administration. The new POTUS has made clear even before his election that he would seek to disengage the country’s armed forces from any deployments overseas. Initially, we must highlight that Trump wants to have absolute control over the decisions of his country and the feeling of being independent to shape his foreign policy is a vital part of his comfort zone. Situations, where a potential OPEC embargo could cause panic in the heart of the US and paralyze everything is a no-go for POTUS. An energy-independent Washington brings a series of significant implications for the US policy in the Trump era. No use of force is deemed necessary for the promotion of US interests, as this would not only ruin the President’s image but also might be proved financially damaging. Thus, the bargaining power of the Gulf countries has been minimized giving the initiative to Washington, leading to much more rational political decisions from the US side.
To this end the current administration has been moving towards easing regulations for oil companies, with most topical the governmental plans to weaken methane control; a move that could save almost $20 million per year for US oil and gas producers, but in the same time has triggered massive public opposition, concerning the potential environmental impact of this development. Additionally, President Trump has ensured that global oil prices are kept within a specific limit, so the costly procedure of shale oil extraction is economically viable and makes the final product competitive in the market. There are several examples of oil markets reacting to a President’s announcement -or rather tweet- and this is so indicative of Trump’s influence on the volatile energy sector; an unquestionable reality that urged numerous critics to accuse the President of market manipulation.
Is should be clear that the current US administration is trying to strengthen the US domestic industry and enhance the macro-economic trends of the country. As oil holds a prominent role in the US national economy, we should anticipate further increases in the global prices with barrel price of WTI staying well over the $50 threshold whatsoever. The developments in the Middle East will probably contribute to this direction, but any large-scale confrontation between the Washington and regional rivals -predominantly Iran- should not be expected. The US shale production industry will keep expanding, contributing to self-sufficiency in the energy sector and affecting accordingly the US foreign policy. All these assumptions though should be considered within the ever-changing geopolitical reality of our days and the current fluid political scene of the United States.