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[Meghan L O’Sullivan] US is forced to see it is far from ‘energy independent’

By Bloomberg

Published : Oct. 22, 2018 - 17:14

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The disappearance and likely death of Jamal Khashoggi is a clarifying moment.

If the crown prince of Saudi Arabia proves to be complicit, this moment will reveal much about the nature of the Saudi leadership. It also tells us something about US-Saudi relations and how vulnerable a partnership not based on shared values can be.

It is a clarifying moment for the US to see just how much freedom from the Middle East American oil production has secured. This crisis over the disappearance of the journalist lays bare the reality that, although the US energy boom has boosted America’s power, it does not afford the US the luxury of not caring about what happens in the Middle East.

US imports of Saudi oil have actually been on the rise in recent months, because of rapid declines in Venezuela’s production and export of its similarly heavier oil. But even if the US were not consuming a drop of Saudi oil, as long as America remains tied to global oil markets, it has deep energy interests in what happens in Saudi Arabia. Although the US could become a net exporter of energy in a few short years, this just means that America will be producing more energy than it consumes. But this is not the same thing as being self-sufficient in oil. Even in this net energy export scenario, the US will still be consuming more oil than it produces, and will need to secure that oil from some other country. However small that quantity of oil might be, it will ensure that the United States remains integrated into the global market. In short, Saudi Arabia, one of the largest producers of oil and the largest exporter of it, retains major influence over the energy reality of the world -- and the US.

There are three ways in which American policymakers still need to factor oil into their response to the Khashoggi crisis. The first is somewhat of Washington’s own making, but is real nonetheless. The Trump administration’s insistence on implementing Iran sanctions explains much of today’s buoyancy in oil prices. Issuing some exemptions to countries trying to work with the US could ease some of the immediate tightness of the market until demand softens and new supplies come on line next year.

Given the continuation of these two policies, the administration will most likely need Saudi Arabia to bring more oil to markets. Although there is some debate about how much oil Saudi Arabia really has on offer, there are few other players to look to in the immediate term.

Second, the Saudi Press Agency released a statement some analysts interpreted as a veiled threat that the kingdom was willing to use oil as a political weapon, as it did in 1973. I am tempted to dismiss this, as Saudi leaders certainly remember the lessons of the 1970s: High oil prices push people away from oil. The high prices of the 1970s threw the world into a recession where absolute demand growth for oil did not just slow, but shrunk.

Moreover, the reforms of the crown prince are, as would be expected, creating hardship for Saudis who have never had to think about employment or wasting energy. Taking action to cut oil production and, presumably, to accept lower revenues would constrain the ability of the Saudi government to manage its reform agenda and would create more opposition to it than the crown prince is already facing.

Nevertheless, Washington policymakers cannot completely dismiss the idea that Saudi Arabia would respond to punitive action for Khashoggi through oil markets. The Saudis do have the capacity to raise prices sharply and abruptly, if a decision maker -- perhaps an impulsive one -- decided to do so. With the US still connected to the global market, the Saudi leadership has a big say in what prices Americans to fill their cars with gasoline.

The final oil consideration that policymakers have to take into account is the biggest one: Saudi stability. The results of a credible investigation could call into question the judgment of current Saudi leaders and ultimately the ability of the kingdom to make the difficult – but absolutely essential -- transformation of its economy and society. Should the Saudi reform initiative fail, Saudi Arabia will likely be a more desperate, more conservative, and certainly less stable place.

Although it would be painful, the US could weather the first two energy shocks. However, should events unfold in the kingdom in such a way that affects the country’s ability to produce and export large quantities of oil for long periods of time, the whole world would feel this shock.

Oil is not, of course, the only consideration at stake here. Perhaps equally crippling to the US could be the perception that America no longer stands up for freedom of speech and human rights. But an honest accounting of US interests in how this current crisis evolves must acknowledge that oil and stable oil markets is among them – despite illusions of “energy independence” promoted by the Trump administration.


Meghan L O’Sullivan
Meghan L. O’Sullivan is a Bloomberg Opinion columnist. -- Ed.

(Bloomberg)