U.S. Is Forced to See It Is Far From ‘Energy Independent’

(Bloomberg Opinion) -- 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 U.S.-Saudi relations and how vulnerable a partnership not based on shared values can be.

It is, starkly, a clarifying moment for the U.S. to see just how much freedom from the Middle East bountiful American oil production has secured. This crisis over the disappearance of a journalist last seen entering a Saudi consulate lays bare the reality that, although the U.S. energy boom has boosted America’s power in a large number of ways, it does not afford the U.S. the luxury of not caring about what happens in the Middle East.

U.S. imports of Saudi oil have actually been on the rise in recent months, because of rapid declines of Venezuela’s production and export of its similarly heavier oil. But even if the U.S. were not consuming a drop of Saudi oil, as I describe in my book, “Windfall,” as long as America remains tied to global oil markets, it has deep energy interests in what happens in Saudi Arabia. Although the U.S. could become a net exporter of energy in a few short years, this just means that – when measured per BTU or per unit of energy produced across all sources – 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 U.S. 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 – and that the price at which supply and demand meet globally will have a major impact on the price Americans pay at the pump. 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 U.S.

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 – due to come into effect in early November, with the goal of bringing Iran’s exports to zero – explains much of today’s buoyancy in oil prices. Issuing some exemptions to countries trying to work with the U.S., as the Obama administration did, could ease some of the immediate tightness of the market until demand softens and new supplies come on line next year. In addition, Secretary of Energy Rick Perry’s recent stated intention not to use to the U.S. Strategic Petroleum Reserve unnecessarily removes one of the few tools policymakers have in a time like this.

Given the continuation of these two policies, the administration will most likely need Saudi Arabia to bring more oil to markets, at least in the near term, to avoid further price hikes in the weeks and months ahead (including the first week in November, when U.S. midterm elections occur). 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, in a surprising development, 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 with other Arab members of OPEC in 1973. I am tempted to dismiss this, as Saudi leaders certainly remember the lessons of the 1970s: high oil prices – particularly ones that are politically driven – 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; global oil demand growth was 7.7 percent in 1972, but this number moved to negative territory in 1974 and 1975, and contracted again by nearly 4 percent in 1980 after the Iranian revolution and Saudi unrest 1979. Particularly at a time when people are actively debating “peak oil demand” and alternative energies are becoming more affordable, the Saudis should be loath to give the world a further strong shove away from oil.

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 for Americans and the world, if a decision maker – perhaps an impulsive one – decided to do so. With the U.S. still connected to the global market, like it or not, 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 as they ponder the correct response to the Khashoggi crisis 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 U.S. 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, including the U.S., would feel this shock. The oil production of Iran, for instance, declined immediately after its revolution, and has not come anywhere close to its pre-revolution production levels since. Although the world will eventually consume less oil than it does today, that day is not on the immediate horizon.

Oil is not, of course, the only consideration at stake here. Perhaps equally crippling to the U.S. could be the perception – already forming in the minds of many – that America no longer stands up for freedom of speech and human rights. But an honest accounting of U.S. 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.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Meghan L. O’Sullivan is a Bloomberg Opinion columnist. She is a professor of international affairs at Harvard’s Kennedy School, and a senior fellow at the Council on Foreign Relations. She served on the National Security Council from 2004 to 2007.

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