Yahoo Finance Oil still rules, alas
Electric vehicles are flooding the roads. Green energy fuels a record amount of power generation. The United States has passed its most sweeping set of renewable energy incentives, ever.
Yet oil, the scourge of environmentalists and the driver of a warming planet, is dominating geopolitics and an escalating Middle East war, much as it has for the last 75 years.
The Hamas terrorist attacks in Israel on Oct. 7, which triggered an Israeli assault on the Gaza Strip that is just getting started, weren’t about oil. But oil is shaping the way the United States and dozens of other nations respond and realign themselves for a world in which the Middle East remains a nettlesome region nobody can afford to neglect.
The new Israel-Hamas war and the implications for oil markets directly affect President Biden’s reelection odds. That, in turn, could determine the outcome of the Russia-Ukraine war, which could influence how China thinks about the pros and cons of invading Taiwan. That puts fossil fuels at the center of an intensifying struggle between authoritarianism and Western-style democracy, whatever that has come to mean these days.
Iran, the world’s eighth-largest oil producer, is the linchpin of this struggle. The theocratic Islamic nation is a sworn enemy of Israel that supports, funds, and trains Hamas, along with Hezbollah in Lebanon and other Middle East militias that have Israel in their sights. Much of the money comes from Iran’s oil revenue. It’s not clear Iran had a direct role in the Oct. 7 attacks on Israel. But Iran benefits nonetheless from anything that weakens Israel and its alliances with other Middle Eastern nations, since that boosts Iran’s leverage in the region. That’s why Iran’s state-controlled media celebrated the attacks on Israel.
Iran probably won’t attack Israel directly, but it can influence or control whether Hezbollah does, and that’s the quickest route to a much wider war. The United States is worried enough about this prospect that it’s rushing attack jets and other military assets to the region to warn Iran of the price it might pay if it encourages further warmongering.
Republican Sen. Lindsey Graham of South Carolina channeled the frustrations of many when he warned Iran on Oct. 15, saying, “If you escalate this war, we're coming for you." Graham said specifically he would introduce legislation to “allow military action by the United States in conjunction with Israel to knock Iran out of the oil business.”
This would actually be a nightmare scenario for Biden, and for many Americans. Oil prices have stayed relatively stable since the Hamas attacks on Israel because nothing that has happened so far threatens Middle East oil production. But an escalation would change that calculus completely. It would raise the prospect of new sanctions or military strikes jeopardizing Iranian oil output. Iran could try to retaliate by attacking oil facilities in Saudi Arabia, which it has done before, or trying to stop oil tankers ferrying oil through the Strait of Hormuz, which it has threatened.
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Iran only produces about 4% of the world’s oil, but that’s more than enough to send prices skyrocketing if there’s a threat to supply — especially if it might affect oil production elsewhere in the Persian Gulf. Traders say oil could easily soar past $150 per barrel if there’s a petro-war, which could equate with US gasoline prices of $6 per gallon or more. Inflation is already one of Biden’s biggest domestic problems, and soaring gas prices during the year leading up to the 2024 election could be ruinous for him.
Russian President Vladimir Putin clearly hopes Biden will lose in 2024 to former President Donald Trump, who has promised to end Russia’s war in Ukraine in one day. Trump is a Putin fan who would presumably stop US aid to Ukraine. Putin also benefits whenever oil prices rise, since oil is Russia’s top export and higher global prices provide more revenue for funding Putin's misbegotten war.
Watching closely is Chinese President Xi Jinping, who undoubtedly wants to know how vigorous and durable US-led opposition would be if he attempted a military assault on Taiwan. If Trump won in 2024 and the United States bailed on Ukraine, that could be a signal to Xi that the United States might take a pass on Taiwan, too, if China moved. China — which is Iran’s biggest customer — favors lower oil prices, since it’s the world’s biggest buyer of oil. But China, like Iran and Russia, also benefits from anything that weakens the United States, and that would include an energy crisis that damaged Biden’s standing at home.
This isn’t necessarily a doomsday scenario. The United States is now the world’s top oil producer, and we’re nowhere near as dependent on Middle Eastern oil as we were during the energy crises of the 1970s. If the Middle East does erupt and energy prices soar, it’s possible Americans could rally behind Biden instead of punishing him just because gas is expensive. And if Biden were to win a second term, he’d no longer have to worry about reelection and he’d have more flexibility in dealing with all the rogue nations slagging Uncle Sam.
Americans sometimes wonder why the United States doesn’t just produce a ton of additional oil and make other producers irrelevant. The reason is the US government doesn’t control oil production the way governments do in most Organization of the Petroleum Exporting Countries (OPEC) nations. Private-sector companies do. If there’s a shortage that pushes prices up, they’ll drill more as it became profitable to do so. But there are still limits on refineries and other parts of the energy infrastructure that would keep supplies tight and prices high if there’s a real crisis.
Saudi Arabia is the second-largest oil producer, and broadly considered the top “swing producer” able to produce more on short notice. The Saudis have been cutting oil production to keep prices steady around $80 or $90 a barrel. But they could crank up the pumps if necessary to keep the world supplied. The Saudis don’t love Biden, though, and like Putin they might prefer to see Trump return, if they had a say in it.
The United States isn’t enfeebled, either. Biden has tried to pivot away from the Middle East, to focus more on China and to manage the huge war of attrition in Ukraine. Biden miscalculated on Iran, mistakenly thinking its malign influence might wane if it could wriggle out from sanctions and sell more oil. But the blinders are off now, and Iran has a lot to lose if it courts a war. That’s always been true of anybody who lights a match in the Middle East. The depressing part is that not much has changed.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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