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Juan Cole

Juan Cole

Juan runs the popular geopolitics blog Informed Comment where he provides an independent and informed perspective on Middle Eastern and American politics.

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Republicans Back Sanctions Against Iran, but Blame Obama for High Gas Prices

President Barack Obama campaigned on energy issues on Wednesday, visiting a handful of oil wellheads on Federal land in New Mexico and a solar installation in Boulder City, Nevada.

The subtext of this Obama campaign is public unhappiness with the price of gasoline and the hypocritical attacks on him over this issue by his Republican opponents. The fact is that there is only one thing Obama could have done to bring down oil prices, and that would have been to veto the National Defense Authorization Act until Congress took back out the provisions for crippling sanctions on Iran. Republicans back these sanctions to the hilt, which is why it is dishonest of them to attack Obama on high gas prices.

US politicians won’t say it. But Christine Lagarde, the head of the International Monetary Fund, has made it clear that the Israeli-US campaign against Iran, into which they have dragooned Europe, could put up petroleum prices by as much as 30% and endanger the world economic recovery. Likewise, India has lashed out at the US Israel lobbies for what it sees as a smear campaign and unrealistic pressure on Delhi to cut off imports of petroleum from Iran.

Back in the US, you can’t mention the elephant in the room or else the Neocons will accuse you of foaming at the mouth (they are the ones who are actually frothing).

President Obama said while at the solar site:

“Now you’d think, given this extraordinary sight, given the fact that this is creating jobs, generating power, helping to keep our environment clean, making us more competitive globally. You’d think that everybody would be supportive of solar power. And yet, if some politicians have their way, there won’t be any more public investment in solar energy. One member of Congress, who shall remain unnamed, called these jobs ‘phony.’ Called them ‘phony jobs.’ Think about that mindset, that attitude, that says because something is new it must not be real. You know if these guys were around when Columbus set sail, they’d be charter members of the flat earth society.”

The object of the attack, Rep. John Fleming, R-La., replied on Twitter: “POTUS uses flat earth society line again. Witty, but no help for folks paying $4/gal thanks to his failed energy policy. #phonygreenjobs ”

Obama lost that one. No one is interested in how modern the solar site looks, they are interested in the price at the pump. He has to do a better job of explaining why petroleum prices are high. If he would admit that it is in some part because of a US struggle with Iran, he might even be able to appeal to the patriotism of the public.

The price of gasoline depends on 1) petroleum supply, 2) refinery capacity (the ability of the world to turn raw crude into gasoline, kerosene, etc.), 3) global demand, and 4) investor confidence, which affects futures prices.

The Iran crisis is affecting demand for Iranian petroleum. Because of the boycott, Iran has been encouraged to produce less, so it is pumping about 300,000 barrels a day fewer now than it typically did last year on average. But over-all global demand is actually quite high, if not historically high, so the reduced demand for Iranian petroleum is artificial. In the context of high over-all demand, reduced Iranian supply contributes to high prices.

Likewise, crippling sanctions, which in some cases have the practical effect of a blockade of the country’s civilian economy, raise the real possibility of a military conflict. (The US has disarticulated Iran’s banks from the world banking system, making it difficult for e.g. Ukraine to export wheat to Iran because of payment difficulties. When you’re taking bread out of children’s mouths, those aren’t just ‘sanctions,’ they are effectively a blockade; and blockades often lead to war.) Iran made this point with naval exercises at the mouth of the Straits of Hormuz, through which about 20% of the world’s petroleum is shipped. Likewise, the saber rattling of Likud Prime Minister Binyamin Netanyahu of Israel has contributed to investor jitteriness. Republican presidential candidates, who have more or less been promising us that they would go to war with Iran if elected, have further made investors nervous, so that it is the height of hypocrisy for them to blame Obama for rising prices.

So although it is true that some 20% of the price run-up is speculation, and although many blame the speculators, these are actually mostly futures traders who are quite reasonably worried about the supply of petroleum 6 months out if there are hostilities with Iran. Iran tensions drive the speculation.

Supply is also constrained by political problems in South Sudan, Syria and Nigeria, as well as by increased use of automobiles in countries such as Mexico, reducing their exports over time.

Saudi Arabia is promising to flood the market by ramping up its production, increasing the supply of petroleum. But industry insiders doubt that the Saudis could produce signficantly more petroleum than they already do, at least for very long. Obama has probably fallen for these unrealistic Saudi pledges. (For one thing, they can’t control factors like increased world demand or the subtraction of supplies as a result of political instability).

The Iran issue is unrelated to increased global demand, which derives from continued strong Asian growth. Despite a slight slowdown in China’s perpetually heated economy and the ruling Communist Party’s increase in the price of gasoline, demand for petroleum imports there will likely grow 6% this year to 5.3 million barrels a day. (China is the second largest importer after the United States). A recent dip in China’s imports from Iran is temporary and has to do with a dispute over pricing.

India imports on the order of 3 million barrels a day now, some 10% of it from Iran, and it is hard to see where it will get enough kerosene / paraffin for its needs, much less gasoline/ petrol, if it gives up the 300,000 barrels a day it gets from Iran. (India says it will not kowtow to unilateral US sanctions, but will only follow the UN Security Council ones). Given India’s projected 7% economic growth rate in the next fiscal year, its demand for petroleum will likely be strong– though the high price could actually shave points off the country’s growth and so reduce demand.

South Korea, another significant oil importer, expects to grow at 3.3 percent in the coming year, which will also put pressure on petroleum prices.

Petroleum is mostly used for transportation; a bit for purposes like cooking.

That is why Obama’s visit to the solar plant was irrelevant. Solar energy generates electricity, used for heating, air conditioning, running factories, powering buildings and households, etc. Unless Americans drove a large fleet of electric cars, you could make all the electricity you liked from solar installations and it would not have much effect on the price of petroleum. And, at the slow rate the US is pursuing solar energy and electric vehicles, my grandchildren are the ones likely to see the day when it matters for petroleum prices. Don’t get me wrong. It is highly desirable that we move in this direction quickly, to forestall climate change and to gain energy independence. It is just that US corporations have kept the American public barefoot and spoonfed with propaganda on these issues and so the public is led by the nose to demand what is bad for them and what they can’t have (cheap petroleum).

As for his visit to the oil fields on federal land in New Mexico, they are also irrelevant. The US uses on the order of 18.5 million barrels a day of petroleum and other liquid hydrocarbons. It imports about 8.7 million of that. Although US production of oil is up slightly, and of distillates as well, there is no prospect that the US could produce 8.7 million barrels a day of petroleum and other liquid fuels in any relevant time frame, and probably it can’t do it at all; certainly it could not do it very long. And nobody is preventing drilling in most of the country, just offshore and in nature preserves, where the total likely production wouldn’t exceed 500,000 barrels a day in the lower 48, even if it was all drilled, with all the pollution and spoliation of nature that would ensue.

(The story you’ve heard about the US becoming a net exporter of refined petroleum products for the first time in years is irrelevant. That just means it is refining petroleum and selling the gasoline e.g. abroad. The US is still the world’s biggest net importer of petroleum, bringing in much more than does China.)

But Republican and some Democratic senators and representatives, and the presidential candidates who are in the back pocket of Big Oil are lying to the US public and saying that we can drill our way out of the problem. And they are trying to blame Obama, under whom US petroleum production has actually increased for the first time in years, for the so-called failure to drill.

That we’re paying a premium for the conflict in Iran is being dishonestly ignored. Obama needs to explain this fact to the people, or he is putting his second term in jeopardy.

By. Professor Juan Cole

Juan runs the popular geopolitics blog Informed Comment where he provides an independent and informed perspective on Middle Eastern and American politics.




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