U.S. Oil Exports Makes Large Middle East War More Likely
There is no telling how many years it may take, but the U.S. decision to lift its ban on crude-oil exports at the end of 2015 could increase the likelihood of a major war between regional Mideast powers that the U.S. will be either unable or (more likely) unwilling to stop.
How is this even possible? To appreciate the argument, one should consider the second- and third-order economic and political effects that have been associated with U.S. oil exports in the past, as well as the totally new market dynamics that are the result of the ban's demise. These effects, when married with current trends in American politics, make it less likely that the U.S. will intervene in a major military conflict in the Middle East in the next 10-15 years -- even as the potential for such a conflict continues to grow.
Refinery Economics: Many observers underplay just how useful a safety valve exporting U.S. crude to foreign refiners is becoming for global oil markets. In the short space of three months since the ban was lifted, and at a time when the arbitrage -- or profit margin -- for U.S. exports is quite low, U.S. crude has left the Gulf Coast to refiners in France, Italy, Germany, Israel, and Venezuela. The first test shipment of crude to China from the Gulf Coast is under sail, and the enlargement of the Panama Canal scheduled for later this year will make it even cheaper to send shipments to East Asian refineries.
Each of the roughly 700 major refineries in the world is a one-of-a-kind factory with its own special set of recipes that can use a number of different crude grades to create products that best fit local markets. Given the easier-to-refine qualities of U.S. tight oil, it can become a very attractive blend stock. Venezuela's state-oil company, PDVSA, has already purchased four U.S. cargos since the beginning of the year to be used to dilute its heavier crude, and in March said it may import up to 100,000 barrels per day (b/d) of U.S. crude over a three-month period. The development is a dramatic reversal of fortune for the post-Chavez regime currently under duress in Caracas. This new trading dynamic, over time, makes the political relationship between the United States and Venezuela less tense.
Economic History: In decades past, U.S. oil exports were used as an economic weapon and had dramatic impacts on U.S. foreign policy. In the summer of 1941, the administration of Franklin D. Roosevelt banned West Coast oil exports to Japan to protest Japanese militarism in East Asia. This decision is viewed by many historians as a proximate cause of the Japanese Navy's attack on Pearl Harbor, with Tokyo's military government choosing to use force to acquire oil and commodity supplies from Southeast Asia rather than capitulate to U.S. political demands.
Fifteen years later, President Dwight D. Eisenhower undermined a joint British-French invasion of the Suez Canal in the autumn of 1956 by threatening to suspend oil exports to Western Europe until British and French troops withdrew. The threats by Eisenhower caused a run on the British pound, which in turn ended the government of British Prime Minister Anthony Eden and rocked the status quo in Europe. While little acknowledged in U.S. histories, this naked display of power greatly embarrassed European elites and helped tip the scales among French and German leaders toward creation of the European Union shortly afterward.
It also turns out that long-term outages caused by political upheavals aren't as rare as conventional wisdom assumes. Outages affecting at least 1 million b/d have occurred six separate times since the late 1970s, during which the U.S. export ban was in effect: The Iranian Revolution and Iran-Iraq War (3.9 million b/d); the 1990-91 Gulf War (4.3 million b/d); Venezuela's 2002 oil strike (1 million b/d); the 2003 Iraq War (1 million (b/d); the Libyan Civil War (1.5 million b/d); and amid U.N. sanctions against Iran that were lifted earlier this year (1 million b/d).
In other words, when the United States has an economic weapon that can be used in a time of need, it uses it, even when the knock-on effects can be quite large. The only reason the United States hasn't used its oil exports as leverage in foreign policy in the past 50 years is that the tool has been absent from the tool box. Now it's back.
Export Economics: The current price spread between Brent oil sold in Europe and Asia and West Texas Intermediate (WTI) priced in the United States is less than $3 a barrel, leaving little profit from shipping oil to Latin America or Europe for refining.
But if we again see a market environment similar to that of 2012-2014, when Libyan production fell by more than 1 million b/d due to its civil war, the spread between WTI-Brent crude grades could average $14-18 a barrel for more than two years. In such an environment, crude could be exported from the U.S. to anywhere in the world at a profit.
This large price spread would induce more supply than is currently appreciated. Estimates vary, but many analysts believe there are between 4,000 and 5,000 drilled but uncompleted (DUC) wells in the U.S. that could be attached to pipelines and fracked if prices rose. The collective production of these wells during a supply shock would be enormous -- 1.6-2.0 million b/d in total if each well produced 400 b/d at peak -- although experts caution that only about 600,000 b/d could be brought on board during the first six months.
The Paris-based International Energy Agency (IEA) confirms the thesis that price is the only barrier keeping U.S. light tight oil (LTO) supplies from surpassing the record 10 million b/d reached in October and November 1970. "Anybody who believes that we have seen the last of rising LTO production in the United States should think again," the IEA said in its most recent Medium-Term Oil Market report, on Feb. 21.
21st Century History: Events during the past five years have damaged, perhaps permanently, the most important strategic relationship in the region -- the alliance between the United States of America and the Kingdom of Saudi Arabia. Since the end of World War II, the United States has, in one form or another, guaranteed Saudi Arabia's security in return for the promise of oil production sold on the global market, with a special focus on supplying America's European and Asian allies.
This guarantee became stronger as the Cold War intensified and the United States itself became deeply dependent on Saudi oil. In the early 1980s, the Reagan administration adopted an official policy called the "Reagan Corollary" that said the United States would intervene to protect Saudi Arabia from threats and unrest from within the region. This policy can be seen as setting the conditions for both invasions of Iraq during the Bush presidencies. But since the start of the so-called Arab Spring in January 2011, the Obama administration -- taking its cue from a public clearly tired of low-intensity military conflict -- has signaled a major retrenchment in the region. This retrenchment can be seen in rhetoric coming from the top of both political parties.
In a wide-ranging interview published in The Atlantic in March, Obama complained at length about "free-riding" nations in Europe and the Middle East who are happy to use U.S. military "muscle" to achieve their own private ends. The president went to some effort during the interview to highlight the administration's general animus toward the Saudi government, such as openly criticizing Saudi Arabia's institutional exclusion of women from much of public life.
Meanwhile, the front-runner for the Republican Party's presidential nomination, Donald Trump, in interviews with both the Washington Post and the New York Times last month, gave the distinct impression that he views the Saudi-U.S. alliance as little more than an economic burden that fails to pay off.
"We're not being reimbursed for the kind of tremendous service that we're performing by protecting various countries. Now Saudi Arabia's one of them," said Trump to the Times. "If Saudi Arabia was without the cloak of American protection, I don't think it would be around."
It is doubtful either Trump or Obama could be as openly critical about Saudi Arabia without the unconventional oil and gas revolution taking place in the United States during the past 10 years, and the subsequent end of the export ban.
Conclusion: Since the 1970s, U.S. involvement in the Middle East has been based on protecting the interests of its oil-dependent allies as well as the assumption that major conflict involving major regional powers of such as Saudi Arabia, Iran, Israel, or Turkey would be economically disastrous to both enlightened and selfish American interests.
But given the slowly-dawning epiphany regarding the true nature of U.S. energy supplies -- the millions of barrels a day of latent oil supplies available for export from the U.S. Gulf Coast if prices return above $70 a barrel for an extended period of time -- it's doubtful the same political rules now apply.
If the United States can supply millions of barrels per day of oil to its political allies by itself, the deep costs to the U.S. economy and its global alliance system caused by a Middle East regional war become much less pronounced. It's possible that the United States is returning to a position similar to its place during the first half of the 20th Century, when the country's relative energy security was so strong that it could stand back and wait for parts of the world to completely implode before acting militarily.
This conclusion is a cause for unhappiness, not just for the personal misery that can be extrapolated from it, but because it portends the end of a generally benign, global liberal order that sustained more winners than losers in the global economy for many decades. When viewed through a more self-interested, mercantilist prism, however, the end of the export ban can be seen as the missing link that predicated, and in some ways dictated, much of the future U.S. posture and politics toward the region for years to come.