Oil No Longer Drives Mideast Policy

As the Obama administration wrestled this week, more or less in public, with its options for responding to a poison gas attack in the Damascus suburbs, one consideration was conspicuously absent: the potential effect on oil prices.

We may look back on this moment as a waypoint marking a shift in the balance of geopolitical power, one that favors America and its allies and weakens Middle East autocracies, along with Russia, which is Syria’s chief apologist. (Whether the current administration is prepared to take advantage of this power shift is another matter.)

In a nutshell, booming U.S. and Canadian oil production has largely decoupled the North American oil market from that of the rest of the world. And if the same technologies that have enabled the North American boom eventually boost production in other major oil markets, from Western Europe to China, the Middle East oil powers may eventually find themselves economically marginalized.

If the world no longer depends on the free flow of petroleum through the Strait of Hormuz, will we continue to care more about the Middle East than we do about other distant places, such as Africa?

I believe the answer is yes. For one thing, the Middle East is home to one suspected nuclear power – Israel – as well as an opposing power, Iran, which appears bent on acquiring the same capability. For another thing, the financial heft already accumulated by Saudi Arabia and other Persian Gulf states will not dissipate overnight, no matter what happens to the future demand for their oil. Many Americans also genuinely care about longtime allies like Israel, Egypt and Jordan, and have strong family and cultural ties throughout the region.

While the prospect of no longer depending on Mideast oil does not mean we will walk away from the region, it will change our approach – and that of our adversaries. We can already see this shift. Iran has made threats all week about the consequences of a strike on Syria, but it has not threatened to interfere with oil shipments. Struggling under heavy financial sanctions, Iran would hurt itself more than it would hurt the West if it took action against oil movements.

Recent price trends for two major oil price benchmarks illustrate how the American and global oil markets have diverged. West Texas Intermediate is the reference price that reflects supply and demand trends here. Brent crude is the key indicator for oil that is delivered in Europe and Asia. Actual pricing in the real world is far more complex, reflecting all sorts of adjustments for quality, delivery date, transportation costs and other factors, but these indicators give us a general sense of where markets stand and how they got there.

For the past several years, WTI traded at discounts of roughly $10 to $20 per barrel compared to Brent. On the surface this seems odd, because the U.S. economy, though hardly robust, has been a stellar performer compared to most of Europe. Both indexes set records early in 2008, just before the financial crisis, and then collapsed after markets froze and economies congealed. We could have expected U.S. oil prices to rebound faster than Europe’s, because our economy has done better since the crash.

But the rapid growth in oil output in the midsection of the country, from Texas and New Mexico northward to Montana and North Dakota, overwhelmed storage and transportation capacity in the region. There was literally no place to put the oil, and often no easy way to move it except by truck, until the railroads raced to expand their capacity. New pipeline facilities took even more time to arrive. As a result, many U.S. refineries in heavily populated coastal states had to keep importing foreign crude, which artificially sustained the Brent benchmark. As recently as six months ago, Brent traded at $23 a barrel above WTI, at about $113 versus $90.

But then the gap rapidly disappeared – not because Brent prices dropped very far, but because WTI prices rose. New transport capacity has made it easier for North American refineries to get their hands on North American crude. Our prices rose, while a slowly improving global economy probably helped support oil prices abroad. By late July, the two benchmark grades’ prices were within $2 of one another, in the neighborhood of $105 a barrel.

The gap reappeared this week as the potential for military action in Syria grew closer. Prices increased on both sides of the Atlantic, but not by very much. At midweek WTI was trading around $109 a barrel, while Brent was near $115. That’s pretty high considering the still-weak economy, but not close to the 2008 record of about $147 for Brent. Some analysts predicted that fighting in Syria could cause Brent to spike near that record, though considering the size of oil stockpiles in many places, I think that’s doubtful. Nobody seemed to think conflict in the Middle East would have much lasting effect here in the United States.

So President Obama had the luxury of being able to disregard oil prices, and the potential harm to the American job market a shift in those prices might cause, as he considered what steps he might want to take against the Syrian regime. I hope he remembers this when he gets around to reconsidering the Keystone XL pipeline that would bring additional crude from northern Canada’s oil sands to U.S. refineries. The environmental lobby wants Obama to block that project, in the vain hope that this would limit development of Canada’s oil (which, if not consumed here, will go to China and elsewhere) and the emission of greenhouse gases.

Carbon dioxide, however, is not the only gas the president ought to consider when he looks over the State Department’s shoulder in the Keystone XL review. He ought to think about sarin, the nerve gas that the Syrian government is suspected of unleashing on its own people. He ought to remember how North American oil production gave him more latitude to respond to Syria’s breach of his much-hyped “red line.”

Which gas will the president view as the bigger threat? Your guess is as good as mine. But whatever he decides to do, he won’t have to worry very much about how it affects the price we pay at the gas pump.