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Past turmoil in the Middle East has often been a sure-fire way of bidding oil prices sharply higher. For example. after Iraq invaded Kuwait in the summer of 1990, West Texas Intermediate (WTI) quickly jumped from $42 to $76 on an inflation-adjusted basis, a spike of about 80%.
But when news broke last week that Iranian General Qassem Soleimani had been killed in an American-ordered drone strike, markets responded far more modestly: Brent crude climbed $2 to $68, with West Texas Intermediate moving in similar fashion, up about $2 to $63. Even after events of the last 24 hours—Iranian missile attacks on American bases in Iraq—prices have been muted: Brent BRN00, -3.97% gained another dollar, but WTI CL.1, -4.59% has actually slipped a bit.
President Trump has threatened to bomb dozens of targets in Iran, which would undoubtedly bring a nasty reaction—perhaps an Iranian attack on an oil tanker or, say, another bombing of Saudi oil facilities, like the one in September. You’d think this these jitters would cause a spike in prices, but no. Why?
It could be that no one really believes that Trump would start another Mideast war. Didn’t he campaign on getting out of the Middle East? And isn’t he desperate to get a Nobel Peace Prize? Indeed, the president appeared to take the off ramp with his remarks made Wednesday—signaling that there will be more sanctions, but no military attack on Iran itself.
But the smallish gains for oil could also be because of something else—the rise of fracking, which has dramatically lessened America’s dependence on imported oil, and with it, our sensitivity to supply disruption. In 2018, for example, about 11% of the oil the United States uses was imported—the lowest level since 1957. Of that, our biggest supplier, by far, is right next door: Canada.
Consider the strategic gains America has made. In 1973, the United States imported about 30% of its oil—within four years it would be nearly 50%.
An OPEC embargo in 1973-74 and Iran’s revolution in 1979 led to sharply higher gasoline prices here, gas stations running out—and the U.S. economy falling into two nasty recessions.
But—as Trump said —American policymakers today have far more wiggle room to decide how to best advance our country’s interests without worrying about oil prices. This is a strategic advantage, and a big one at that. It’s also supportive of one of the big themes Trump campaigned on four years ago: to reduce America’s footprint in the Middle East. We don’t need their oil, and other than supporting Israel and keeping shipping lanes open, there are fewer reasons for us to be there. Speaking of keeping shipping lanes open, perhaps countries that are more dependent on Mideast oil than we are—China and Japan, for example—could do more to help out.
Aside from giving Americans a break at the gas station, there is another strategic advantage to lower energy prices: It hurts repressive oil powers like Russia and Saudi Arabia. The collapse of oil prices in the 1980s was the final nail in the coffin for the Soviet Union, and even today, 30 years later, the Russians have been unable to diversify away from oil and it is hurting them.
The math is simple: Revenue from oil and gas exports accounts for upwards of half of Russia’s general budget. Higher prices gives Vladimir Putin more money to stir up trouble abroad; lower prices make life more difficult for him. I’ve long said that the former KGB man is punching well above his weight on the international stage; low energy prices are his Achilles heel. Western analysts tend to talk a lot about Russia’s strengths, and not so much its weaknesses, which are significant. Other than energy and weaponry (and vodka), Russia doesn’t really make anything the world wants. The Russian economy is a basket case.
Saudi Arabia is also trying to move away from oil. This helps explain last month’s IPO of a portion of Aramco 2222, -0.43% , the gigantic oil company. Saudi Crown Prince Mohammed bin Salman planned to use the revenue to pay for his ambitious plan to build up Saudi Arabia’s non-oil economy. He had hoped to raise about $100 billion (context: Aramco’s worth is estimated at around $2 trillion, about $700 billion more than either Apple or Microsoft), but it looks like he got only about a quarter of that. When all you have is oil and prices are low, or at least not outrageous, it’s hard to change. Too bad. Saudi Arabia, if you’ll recall, is a repressive, hardline police state that was home to 15 of the 19 hijackers on 9/11, and, most recently, the terrorist who killed three Americans at a navy base in Florida. We still consider he Saudis an ally, but they need to change too.
We can be thankful that both Iran’s comments and Trump’s signal a willingness to step back from confrontation. Trump doesn’t want war. Neither does Iran, which is dealing with a shattered economy, internal unrest and crippling sanctions. Let’s hope for peace—not only for peace’s sake—but to ensure that oil prices stay low.
