The Fuse

Oil Politics: Gathering Storms?

June 11, 2015

Guest Post by Jonathan M. Baron |

Jonathan M. Baron is the founder of political risk consultancy Baron Public Affairs, LLC.  He previously held senior staff positions with the House and Senate leadership.

Notes from the 6th OPEC International Seminar

VIENNA, AUSTRIA – OPEC deeply impacts two major U.S. interests: Iran sanctions and the American oil and natural gas production revolution. The OPEC International Seminar offers important insights into these issues and suggests future developments with significant, and perhaps underestimated, disruptive potential.

Iran Reemerges

If reached, a formal accommodation with Tehran will reflect, not cause, enormous desire for project development in southwestern Iran.

Whatever the outcome of the formal negotiations between the P5+1 and Iran, the sanctions will be undone imminently. Contrary to expectations, the reentry of Iran into the global economy will not result from a diplomatic agreement, but rather erosion caused by building momentum for energy investment. If reached, a formal accommodation with Tehran, will reflect, not cause, enormous desire for project development in southwestern Iran. Judging by the sentiments conveyed from representatives of governments and the oil and natural gas industry, the end of the sanctions regime has arrived. Deal or no deal, much of Europe and Asia already have resolved to proceed with reentry into Iran, particularly due to the collapsing security environment in Iraq and the pariah status of Russia.

In this way, the sanctions-based strategy supported by the vast majority of U.S. decision makers has proven inadequate. The Iranians calculated that Washington would be unable to withdraw from the Middle East, would implicitly forswear military action as a credible option, and would maintain support for sanctions that denied access to some of the world’s most attractive hydrocarbon projects. Once even the United States effectively granted the regime the inevitability of a nuclear weapons capability, the cost of sanctions could not be justified internationally.

Low Oil Prices and U.S. Politics

Much commentary has focused on the likelihood of low oil prices through 2015 and beyond, assuming no major geopolitical event. Yet, the impact of this price level on U.S. domestic politics largely has escaped scrutiny. Certainly, comparatively inexpensive gasoline advances economic growth and advantages political incumbents with voters incredibly sensitive to energy costs as a percentage of household income. The current political moment and coming electoral season nonetheless create the possibility for a powerful dynamic not experienced since the 1980s.

  • Leading energy companies and financial institutions anticipate panicked selling of U.S. production capacity later this year. The very innovators who have revolutionized oil and natural gas production and threaten OPEC’s power as swing producer must service the significant debt burden used to finance the recent expansion and now find themselves dangerously exposed. According to some estimates, the U.S. market for energy-related high-yield bonds exceeds $200 billion, more than triple its size in 2007.
  • With rising political risk internationally, America as a destination for energy development capital has grown more competitive. A wave of insolvency among smaller independents would invite a flood of investment in the U.S. energy sector, especially from the major integrated players and sovereigns. Arguably, America’s energy innovation confronts a profound threat from OPEC’s predatory pricing. In a populist political era increasingly defined by the tension between entrenched incumbents advantaged by regulatory manipulation and startup disruptors imperiled by such interventions, the U.S. shale revolution might have conquered geology only to be crushed by cartel behavior.

The damage associated with such a scenario would be disproportionately inflicted on largely conservative interests during the most intense period of a crowded Republican presidential primary contest. A new momentum for policies to counter OPEC’s market interventions at America’s expense (on both ends of the price spectrum) and China’s opportunism must be anticipated, with potentially important effects on the mergers and acquisitions market.

Even amid the oil price volatility that has dominated the post-1972 period, the hope for stability persists unabated.

Even amid the oil price volatility that has dominated the post-1972 period, the hope for stability persists unabated. OPEC members decry demand uncertainty and consumers curse supply fluctuations. Yet, the coming months seem to promise continued disappointment. With Iran potentially opening to massive international energy investment and smaller U.S. independents under considerable pressure, the landscape could shift significantly in the coming months.

ADD A COMMENT

  1. RGarcia says:

    Terrific insight. Asian investors, including Sinocorp, are already large investors in U.S. Oil and gas resources. However the over leveraged US companies are being kept alive by private equity investment for now. While this will delay the day of reckoning, it will no doubt come.