In Washington a group of elderly (mostly) men in suits, led by the President of the United States, has gathered to make sure that the world has an ample supply of oil to keep prices low enough to avoid voter unhappiness. In London hundreds of mostly young protestors, some semi-naked or in colorful costumes that do not qualify as business-casual, led by a teenager, have thrown their bodies to the pavement and marched on Parliament and Shell Oil to persuade the government to end the globe’s use of that greenhouse-gas emitting fuel.
First, to Washington. When President Trump imposed sanctions on buyers of Iranian oil, he granted several countries waivers until May 2 to allow them to adjust to the sanctions regime. Secretary of State Mike Pompeo has announced those waivers will not be renewed. Any company in any country buying oil from Iran, or swapping their goods for Iranian oil, will face sanctions, which in effect means denial of use of the international financial system.
Hardest hit will be Turkey, India and China. Turkey’s government “rejects unilateral sanctions”, but local companies will comply. India says it will abide by U.S. rules. China, which can’t afford to seem to be bending the knee to Tariff Man Trump, says it will maintain “normal cooperation” with Iran, but many of its leading firms will not. Bank of Kunlun, a key facilitator of Sino-Iranian trade, reportedly will no longer arrange payment transfers with Iran; Asia’s largest refiner, China’s Sinopec, is set to receive its first shipment of U.S. crude since last September; Lenovo, the world’s largest computer manufacturer, will no longer sell to Iran; and Huawei Technologies has laid off most of its staff there. Iran, wounded but dangerous, threatens to close the Strait of Hormuz, through which 20% of oil traded, passes if the U.S. interdicts its tankers.
Trump is really rolling the dice. Every President hates the prospect of facing the voters when gasoline prices are rising. Those are the prices we Americans confront regularly when we fill up the tanks of our pick-up trucks and SUVs, and when we drive past the large price signs on gasoline stations. And rising crude oil prices generally push gasoline prices higher. The President is gambling on three things to prevent a gasoline price spike: U.S. crude production: Saudi promises; and America’s Strategic Petroleum Reserve (SPR). He should win his bet.
America is now the world’s largest crude oil producer, (12.0 million barrels per day according to the government’s Energy Information Administration). Its frackers can ramp up production rapidly to support an increase in exports, already at a record level of 3.6 mbd, headed towards 9 mbd by 2024.
Saudi Arabia (11.1mbd) and the United Arab Emirates (3.1mbd) have promised to see that the market is “balanced”, adequately supplied. But the Saudis have given no clue as to the price at which they will consider the market balanced, and with its Aramco producer scheduled for a public offering in 2021 will want as high a crude price as it can wrest from consumers.
Meanwhile, this Saudi pledge of support for an American policy initiative – albeit one that is very much in Saudi interests – lends weight to those who see Trump’s muted reaction to the killing of Jamal Khashoggi as more an exercise in realpolitik than insensitivity to the depravity of crown prince Mohammed bin Salman. We will know more about the unlovely Saudis’ capacity for reciprocity if they restrain OPEC’s drive for higher prices when the cartel meets in Vienna on June 23. My guess, and it is only that, is that OPEC will try to head prices to $70 per barrel, higher if they reckon that any reaction by Trump will take the form of tweets.
Should the Saudis balance the market at a price Trump deems too high, he can put pressure on prices by drawing down the 727 million barrel SPR at a daily rate estimated by some to be equal to four times the lost Iranian oil. The SPR is not as potent a weapon as it might seem because of logistic problems, but neither is it something OPEC can ignore.
Crude prices do fluctuate a great deal. After hitting $108 per barrel in mid-2014, the U.S. benchmark price (West Texas Intermediate, or WTI) collapsed to $29 early in 2016. Most recently, prices were around $58 when OPEC and its co-cartelist Russia decided to vote themselves a larger share of the global income pie. They curtailed production, jumping prices to $66, 46% higher than at the beginning of the year. Where they more or less remained until falling a bit below $63 on Friday.
While Trump battles to keep crude supplies moving, a so-called Extinction Rebellion to protest climate change tied up London to pressure the government into committing to net zero greenhouse gas emissions by 2025. Unfortunately, no UK government, no matter how green, can have a significant effect on total global emissions. Few of the 200 signatories to the 2015 Paris agreement are meeting their emissions-reducing goals, and the agreement contains no enforcement mechanism. Far from falling, global C02 emissions from fossil fuels and industry rose 2.7% last year to an all-time high according to preliminary data from the Global Climate Project. China’s were up 4.7% and have not reached their peak, India’s rose 6.3%, and America’s rose 2.5% but are expected to resume their decline in 2019.
China is the world’s largest emitter, and to its 29% share of the world’s emissions in 2016 (U.S. share is half that) must be added those it is exporting by financing some 700 coal-fired plants around the world. Coal-dependent India is desperate to provide electricity to the 18,452 villages (93% of the nation’s total) with 31 million homes without any or a wildly inadequate supply of electricity. “Coal,” says the Brookings Institution’s Samantha Gross, “is central to India’s political economy.”
That is the reality of energy markets. The political reality is voter opposition to such measures as carbon taxes – voters from Australia to Alberta have unseated governments that proposed them. In America, of the major economies the world’s largest greenhouse gas emitter per capita, the Republican President says the whole thing is a “hoax”, and not a single Democratic senator voted to support Alexandria Ocasio-Cortez’s Green New Deal when they had the opportunity to do so for fear of antagonizing voters for whom the cost of such proposals matters. The day may come when domestic supporters of a carbon tax, and of measures to force other countries to reduce emissions. But it is not here yet.
Still, progress often has been made by people who challenge perceived realties. Galileo (no, the sun does not rotate around us), Churchill (Hitler is not a sure winner), and Barack Obama (Americans will never elect a black President) come to mind. As Stephen Sondheim put it, “Everybody says musn’t rock the boat …. Well, I say try…. Tilt at the windmill, and if you fail, you fail.”