Trump's Iran Policy Is Blowing Up His Energy Agenda

Stock SectorMay 10, 20188min12

President Donald Trump’s decision to pull the United States out of the Iran nuclear agreement has rightly been described as a historic foreign-policy blunder on its own terms. But it has also highlighted the limitations of another of the administration’s goals: U.S. energy dominance. International crude prices spiked to levels not seen since 2014 after the news that the United States was withdrawing and intends to curb Iranian oil sales effective immediately by reimposing sanctions on the purchase of Iranian crude. That has stoked fears of shortfalls given the continuing declines in Venezuelan oil production and growing geopolitical risks to oil supplied by Libya, Nigeria, and elsewhere.

Higher oil prices mean higher gasoline prices for consumers, and Trump’s recent tweet attacking OPEC for pushing up oil prices was a reminder of how sensitive policymakers remain to the political and economic risks of higher energy costs. As in previous administrations, concerns about higher oil prices prompted the Trump administration to reach out to major oil producers about increasing their output to offset any adverse price impacts of the Iran announcement. Saudi Arabia released a statement that it remains committed to “sustaining growth in the global economy” — a signal that it may be willing to pump up production to keep oil prices from overheating. That is a shift from its recent rhetoric that it wanted to see higher oil prices to induce more investment in future oil supply to avoid markets becoming too tight (not to mention its own budget needs and planned public listing of state oil company Saudi Aramco).

What’s notable about the Trump administration’s outreach, however, is that it remains necessary even in the face of surging U.S. oil production that has put the country on course to soon be oil independent (on a net basis). The U.S. Energy Information Administration projects that U.S. net oil imports in 2019 will be their lowest in more than 60 years. Such forecasts undergird the administration’s calls for U.S. “energy dominance,” which administration officials have defined as “a self-reliant and secure nation, free from the geopolitical turmoil of other nations that seek to use energy as an economic weapon.”

The need to call on the Saudis to stabilize oil markets in the wake of the Iran announcement, however, lays bare why increased oil production alone does not make the U.S. immune to the realities of the global oil market. As oil can be freely traded, there is, broadly speaking, one world oil price. A disruption to supply somewhere in the world will thus cause oil prices, and consequently pump prices, to rise in the United States, even if it imports no oil at all.

Shale oil is unique in that its production can be ramped up and down far more quickly than conventional oil supply, leading some to dub it a new swing supplier in the market. But U.S. shale output, while flexible, still takes six to 12 months to respond to price changes and is determined by the decisions of thousands of individual firms, not by the government.

The vulnerability of the U.S. economy to global oil price spikes, even if it is a net-zero oil importer, is a reminder that the best way to increase the resilience of the United States to geopolitical risks is to reduce how much oil it uses as a share of GDP in the first place. The administration’s recent decision to roll back fuel economy standards thus directly undermines U.S. energy security.

The need to turn to other producers in the face of a potential disruption in Iranian supply is also a reminder that the U.S. Strategic Petroleum Reserve has value even if the United States imports far less oil — or no oil at all. The crude oil in the U.S. reserve, along with other countries’ strategic stocks, can temper global price shocks that result from supply disruptions.

Unfortunately, in response to the perception of increased energy security owing to the shale boom, the U.S. Congress has been selling off the petroleum reserve piecemeal to fund other budget priorities. The United States is part of an agreement with other International Energy Agency countries to release strategic stocks, if needed, to offset supply disruptions, and the United States benefits from those collective actions regardless of how much oil it imports. Indeed, in the wake of Trump’s Iran announcement, the International Energy Agency, aiming to ease fears of price spikes, put out a statement that it “stands ready to act if necessary to ensure markets remain well supplied.”

The shale revolution has transformed the United States into a one of the world’s biggest oil producers, with substantial economic and geopolitical benefits. But Trump canceling the Iran deal reminds us that shale has not freed the United States from global oil market turmoil, nor does dominance come from more oil and gas supply alone.

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