Through an (oil) glass darkly

The profit margins Big Oil requires are no longer to be made in Saudi Arabia but in Iran and Iraq. Once the US concludes a nuclear deal with Iran, Big Oil will see to it that it sticks, and Washington can turn its attention to the true cause of global terrorism – and its sponsors.

The over-riding principle of US geo-political strategy in the past 100 years is simply stated: energy security. Second only to this principle of security of energy supply is the securing of commercial advantage for US Incorporated.  Viewed through these dark lenses, US actions in recent times become much clearer.

The Oil Shock
Winding the clock back to 1973, the Arab oil embargo during the Yom Kippur War came as a complete shock to the US generally and to secretary of state Henry Kissinger in particular, who believed that this step would never be taken.  As a result of this embargo, the oil price quadrupled from US$3 to $12 per barrel by early 1974.

But as we now know from the then Saudi oil minister, Sheikh Zaki Yamani, while both the Saudis and the Shah of Iran were content for the oil price to fall back to $3, Kissinger prevailed upon the Shah to maintain the price at the higher level.

Why would Kissinger and the US have done that? Firstly, new oil production   in Alaska, the North Sea, and the Gulf of Mexico – which reduced US/UK reliance on the Saudis – was only viable at the higher price. Secondly, the US was able to pay for the oil with newly printed “petrodollars”, which it was agreed would be recycled to the US.  The genius of the strategy was that the Organization of the Petroleum Exporting Countries (OPEC) got the blame.

Fast forward
The George W Bush administration, particularly vice president Dick Cheney, had been convinced by the “Peak Oil” thesis to act to secure oil supplies for the US and did so firstly in Iraq in 2003. However, the planned follow up – “Real Men go to Tehran” – foundered as the US became bogged down in Iraq by Iranian-sponsored Iraqi resistance from 2003 onwards. In my view it came to a definitive end in a 2007 “Suez Moment” when China exercised an economic veto over this US adventurism.

Once this physical intervention had failed under Bush – who was a Big Oil president – US strategy changed upon President Barack Obama’s election in November 2008 on behalf of Big Money.  Obama entered office at a time when the oil price had spiked as high as $147/barrel in July 2008, only to collapse as global trade credit dried up during the financial crisis that year.

By the time of its meeting in December 2008, OPEC had already cut production by 2 million barrels per day, but the oil price had nevertheless continued to fall to $40/barrel. The announcement by OPEC of a further 2m bpd cut appeared to make no difference and the price fell to $35/barrel.

Enter the funds
At this point, Big Money came to the rescue of the Saudis. US investment banks directed passive risk averse “inflation hedging” investors in Exchange Traded Funds into commodity markets generally and the oil market in particular. The oil price re-inflated dramatically during 2009 despite a massive surplus of oil that sat in floating storage all over the globe until the winter of 2009.

For the next six years, the oil price never went below $80, and indeed spiked over $120/barrel, but somehow the US gasoline price always remained below the politically sensitive levels at which President Obama’s re-election could have been endangered.

In early 2012, I explained in Asia Times and elsewhere that a macro-market manipulation of the oil market price was under way, which was being supported by quantitative easing “money printing” by the Federal Reserve Bank. I predicted then that when QE ended – which took three years longer than I believed it would – the oil price would collapse to $45 to $55 per barrel.

Funding US shale oil
The combination of an oil price that was supported at over $80/barrel and massive credit extended to development of the US shale oil industry led to phenomenal growth in US shale oil production. This in turn added to increasing oil over-supply, as demand also fell both in the US and Europe.

When the QE tap was turned off in late 2014, the falling oil price then plunged precipitously, as I had forecast three years before, to as low as $45/barrel.

History does not repeat itself, but it does rhyme. Funded by what was essentially an involuntary carbon tax paid by the developed world to oil producers, the US was at last able to make itself independent of Saudi Arabia. In my view, the new capacity of the US to act as swing producer in response to high oil prices represents one of the most significant developments in the history of oil markets.

US rapprochement with Iran
I believe I am probably the only Westerner to have made a presentation (on energy strategy last year) to Iran’s top policy-making body, the Expediency Council. As anyone will know who has been for any length of time in Iran and had the opportunity to meet the sophisticated and urbane decision-makers now once more in power after eight years of kleptocracy, Iran today bears no relationship at all to the myths and caricatures propagated in the Western media.

During the course of negotiations over some 18 months, the US has come to understand the reality of the current administration, and the fact that Iran, and its neighbor Iraq, are truly open for business. It is in Iraq, where Iran essentially exercises a veto over foreign adventurism, that the last and potentially most profitable great oil and gas development opportunities in the world remain.

Since Saudi Arabian oil is essentially played out and in run-off mode, the profit margins that Big Oil requires are no longer to be made there, but are instead to be found in the development of Iran and Iraq’s vast, relatively unexploited, and extremely cheap to produce oil reserves.

This is today’s great oil prize. It was why a delegation of 120 French businessmen was in Tehran when I was last there, and why Germany, Italy and other European countries are all over Iran like a rash.

It is also why the US is so keen to conclude a deal with Iran, and why Big Oil will see to it that once an agreement has been reached their tame Republican legislators will call off the dogs.

It also means that the US will before long be able to turn its attention to the true cause of global terrorism, which is of course the malign strain of Seventh Century Desert Islam currently laying waste to swathes of the Middle and Near East, as well as to its financial sponsors.

Through a glass darkly
So, viewed through the lenses of energy security and commercial advantage the behavior of the US and other players comes clearly if darkly, into focus.

I believe we will soon see a deal between the P5+1 (the permanent members of the UN Security Council plus Germany) and Iran and the beginning of the relaxation of sanctions. But it may be a mistake to think that Iran and Iraq will flood the world with cheap oil when their interests are better served by conserving it.

Now that the full corruption of the Ahmadinejad years and its legacy in Iran’s oil bureaucracy are becoming daily more apparent, there is a growing realization in Iran that perhaps the only thing that saved Iran from the economic collapse inflicted on post-Soviet Russia were the US sanctions which prevented access to hard currency accounts in Switzerland.

Unintended consequences, indeed.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.