By Chris Cook, for Trend
Obama's Smart Energy Strategy
On taking office in January 2009, President Barak Obama inherited a failed energy policy from the George W. Bush administration which had attempted to secure Middle East oil & gas resources by military means through creating client states and imposing one-sided contractual terms favouring US International Oil Companies (IOCs). However, China's threat in 2007 to pull the plug on the US financial system forced the US to back off in Iraq, in the same way that the US threat in 1956 to pull the plug on £ sterling forced the UK to pull out of Suez.
Consequently, the 2008 US financial meltdown obliged the incoming Obama administration to take a very different approach to US energy security. There were two major objectives of Obama's resource resilience energy strategy: firstly, to rid the US for good of their historic reliance on Saudi oil, and secondly, to make a transition through gas as a bridging fuel to a low carbon economy.
The first objective was achieved by Obama's investment bank collaborators who used Saudi/GCC petrodollars to inflate the oil price from its low of $35/barrel in 2009 by manipulating the Brent/BFOE benchmark oil price. The price was then maintained in a range between a collar under oil prices of $80/barrel and a US gasoline price cap at levels which would not threaten Obama's 2012 re-election chances.
The effect of these artificially high prices were firstly, to fund indiscriminate lending to US shale oil and gas developers and secondly, to finance renewable energy such as wind and solar which substituted for fossil fuels. Finally, high prices led to massive investment in energy savings such as in more efficient car engines. As a result the US increased oil production by 5m barrels per day, and made oil product savings of maybe 2m bpd. When added to new high cost global sources of oil such as Canadian tar sands, and global renewable energy and efficiency, particularly in the EU, this led by 2014 to a substantial global surplus of oil production, which has now become structurally embedded.
The increasing surplus of oil supply led – as I forecast it would in 2011 – to a collapse in the oil price to $45 to $50/bbl in late 2014 after the financial Quantitative Easing (QE) pump of Federal Reserve Bank dollars was finally turned off.
Obama's Energy Doctrine
Obama's strategy – executed through Hilary Clinton's State/CIA power nexus – was for Caspian and Qatari gas to supply Europe, displacing crude oil and oil products and competing with Russia. Resource nationalism – particularly in Turkey and Syria - stood in the way of this. Meanwhile the massive US base at Al Udeid has effectively come to secure Qatari gas production and an effective position of Qatar as a US proxy in the MENA region acting against resource nationalism by promoting Islamism.
The US strategy was therefore to create a new wave of non-nationalist Sunni Islamism such as the Muslim Brotherhood in Egypt and elsewhere, and Gulenism in Turkey. The outcome desired by the US was Balkanisation of the region to create a Kurdish Petro State (which would be tolerated by a Gulenist regime in Turkey) with Islamist territories elsewhere acting as conduits for Qatari gas transit to Europe by pipeline.
However, Obama's smart energy policy was so successful that the accompanying wave of new smart technology and investment led to an irreversible tipping point in the global economy of Peak Demand the effect of which is to cap the global oil price at or around $50 per barrel.
Saudi Arabia has clearly learnt the truth of Yamani's dictum that the Oil Age is not ending for lack of oil, since they would not conduct the Aramco IPO if the future oil price trajectory were upwards. Clearly, Saudi Arabia is now casting covetous eyes on Qatari gas, since this will enable them to free crude oil for export, particularly in the summer. In other words, Qatari gas will act as a bridging fuel while their ambitious (and in my view unimplementable) Energy 2030 programme progresses. Such a Saudi gas for oil swap is unlikely to take place on favourable terms for Qatar.
So President Trump has now turned away from the Obama doctrine at least in part due to his personal antagonism to anything Obama was able to achieve in office. Unfortunately, as with his similar rejection of COP 21 and Obama's domestic US energy policy he has no constructive Plan B.
As a result of Trump's impulsive action, Saudi Arabia has now been permitted to take extraordinary measures, with the full support of the US, which essentially constitute war on Qatar by economic means. Moreover, Qatar has been presented with a detailed ultimatum including a draconian prohibition in dealings with Iran and the scope for rapid escalation is clear.
Today's events in Tehran – an attack on the Majlis and an unprecedented suicide bombing at the shrine of Ayatollah Khomeini – provide a grave challenge to President Hassan Rouhani and his colleagues in Iran's government. Trump's top military/security team is extremely antagonistic to Iran, and clearly hope and expect that Iran will act stupidly and aggressively in response to this provocation.
What is Iran's Smart Move in this difficult position?
The Smart Move
In my view, the smart, and unexpected, policy for Iran would be to propose a constructive regional initiative based upon energy/resource co-operation and resilience. This may perhaps commence with a humanitarian offer to Qatar of essential supplies through international waters.
What appears to be a unilateral US-backed resource grab by Saudi Arabia creates an opportunity for Russia, Iran & Qatar (who between them possess more than 60% of global gas reserves) to collaborate in launching a networked physical and financial global market in natural gas based upon a new settlement between gas producers and consumers.
The market in Liquid Natural Gas (LNG) is key to such a new settlement. While historically the global natural gas market has been fragmented and largely bilateral due to deliveries via static pipelines, the last five years has seen massive new production and infrastructure for liquidising and decompressing Liquid Natural Gas (LNG). The combination of diversity of supply, flexibility of delivery and homogeneity of gas (there are many grades and qualities of oil, but CH4 is CH4) has now led to an over-supplied global 'buyer's market' in natural gas. The emergence and convergence of a global LNG price is strikingly illustrated by this chart.
I believe – based upon my experience of implementing the UK Natural Gas Balancing Point Futures contract in 1995 as a Director of what is now ICE Europe – that the potential now exists for a global gas 'Balancing Point' physical gas market price based upon the price at which LNG is delivered into and out of global LNG infrastructure. This could enable financial energy credit instruments (not derivatives) based upon this price which are issued, traded, cleared and settled within a global energy clearing union.
The EU, which is fuming at Trump's America First antics, as well as China, India and Turkey (whose President Erdogan has offered to intermediate), could be expected to support a new global gas market settlement, while neutral countries like Norway and Switzerland could be expected to facilitate it.
So my advice to President Rouhani is to play chess where Trump is playing the fool, and to begin a process of depoliticised energy diplomacy based upon competition for quality of energy as a service and cooperation to reduce energy costs within a new natural gas global market paradigm.
Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and a commentator.