It’s not fun playing spoilsport, but someone needs to point out that President Obama is, as ever, over a barrel—in this case a barrel of crude. The United States has long backed stability in the Middle East – even embracing odious strongman regimes – simply because we need oil. No amount of soaring rhetoric will loosen that noose.
Nothing could bring that reality home more clearly than news that the Iranian president Mahmoud Ahmadinejad, having recently appointed himself oil minister, will likely chair the upcoming OPEC meeting on June 8. At the same time that the International Energy Agency is pressing for increased production to offset output lost in Libya, Iran’s volatile leader will be at the helm of the only organization in the world that can stabilize oil markets, most probably arguing for higher prices.
It is to be hoped that Ahmadinejad’s political problems at home, where he faces an ongoing power duel with Supreme Leader Ali Khameni, will not lead him to reckless showmanship and posturing that could rattle oil markets. (Given his history, that seems unduly optimistic.) Iran has long held an important position within OPEC ranks as the group’s number two producer. Iran has also long argued for higher prices.
The largest OPEC producer is of course Saudi Arabia, which has traditionally been the voice of reason within the organization – and has long opposed Iran’s quest to hike revenues. That authority has stemmed from Saudi’s great wealth, as well as from its consequent (and unique) ability to be the unit’s swing producer. When prices drop, Saudi Arabia has been able to step in to restrict production, taking a near-term hit to revenues. When prices soar, the Saudis have flooded markets until prices settled down.
How Saudi Arabia will respond to Iran’s probable push to boost prices has become a guessing game. There is no question that Saudi Arabia is unhappy that the Obama administration pressured the resignation of Hosni Mubarak, a long-time U.S and Saudi ally. After having expanded its production last year to temper soaring prices, the Saudis apparently did not boost output in March to offset the Libyan cutbacks in spite of assurances it would do so. Whether that is a nod to its own need to keep prices high as it attempts to buy off demonstrators at home or a gentle reminder of its power over the U.S. is not clear.
What is clear is that Saudi Arabia does not have the running room it once did. Doug Terreson of research powerhouse ISI has concluded that the Saudis need oil prices above $90 per barrel to meet new spending promises and still balance its finances. OPEC as a group requires prices to stay north of $90-$95. Thus, the Saudis may not be keen to engineer a price drop.
On the other hand, OPEC overall has to contend with the reality that higher oil prices can crush usage – an outcome that was not guaranteed years ago when OPEC first ramped up its control of the market. The 40% spike in prices since last year has already lopped off considerable demand; OECD consumption dropped 3.4% last month. Though non-OECD regions, and many countries temper price hikes through subsidies and taxes, there is no question that world drive growth in demand markets are feeling the impact of high prices.
The Saudis may not have the flexibility they once had, but neither do we. Because of the near-sightedness of successive administrations, we remain dependent on foreign oil. In April, we imported 61% of our oil, and spent $42 billion to do so. That reliance, and the continued vulnerability of our economy to the vagaries of the oil markets, constricts our foreign policy today as much as it has in decades past. In effect, we can embrace the Arab Spring as long as it doesn’t stray into Saudi Arabia, Kuwait, the UAE or any other major oil-producing nation. That is why, of course, President Obama felt emboldened to chastise the leaders of Bahrain for quelling protests, but never mentioned Saudi Arabia.
That neither political party has had the courage to tackle our dependence on imported oil over the past four decades is surely one of the most appalling and enduring failings of our government. It not only guarantees our vulnerability to the whims and fortunes of unstable regimes in the Middle East, South America and elsewhere; it does the same for the people of those countries.