July 17, 2018
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In This Newsletter

1) Guest appearance on "Keeping It Real with Alex Garrett" on gasoline prices (podcast)
2) Guest appearance on the "Jim Bohannon Show" on Saudi Arabia and oil (podcast)
3) The Risks of the Trump Administration's Whiplash Policy on Iranian Oil (Atlantic Council)
4) Trump Is Right About Russian Energy, And Here's What He Can Do About It (Forbes)
5) 7 Things Currently Driving The Price Of Oil Higher (
6) US pressure a wake-up call for underspending NATO Members (Arab News)
7) Trump-Putin summit an appetizer for future relations (Arab News)

As the Trump Administration prepares to re-impose nuclear-related sanctions on Iran following the president’s decision to withdraw the United States from the Joint Comprehensive Plan of Action (JCPOA), its treatment of Iranian oil sales could dramatically impact both the United States’ Iran strategy and the global oil market. The administration’s apparent decision to compel buyers to zero out their purchases of Iranian oil by November is likely to have dramatic consequences for both the effectiveness of the sanctions and the markets and has the potential to negatively impact both.

On Tuesday, June 26, a senior State Department official told reporters that it was not likely to issue exceptions to US sanctions for countries that were significantly reducing its purchases of Iranian oil. This is a departure from the Obama Administration’s approach when these sanctions came into effect in 2012. As the official explained, the Trump Administration instead expects all current purchasers of Iranian oil to halt imports prior to November 4—otherwise, they face the threat of US sanctions against any entities involved in the imports, including financial institutions, refineries, shipping companies, and insurers.  

The administration may have realized the challenge and consequences of this goal, and by July 2 the State Department’s head of policy and planning, Brian Hook, delivered a subtly different talking point, saying that the administration’s goal was to get to zero as soon as possible. The initial talking points may have rattled US officials for good reason. If successful in its initial approach, the administration would remove as much as 2.5 million barrels per day from global markets. Because the re-imposition of sanctions coincides with a significantly tighter oil market, removing this much oil from the global market would have an immediate and severe impact on oil prices. Oil prices rose as much as 3 percent when the Trump Administration announced the withdrawal from the JCPOA in early May, signaling the potential for even greater price increases if customers cease purchases of Iranian oil. However, should the Administration fail to convince buyers to halt purchases of Iranian oil prior to the deadline, it would face an ugly choice: whether to impose sanctions on major institutions of countries that continue to purchase Iranian crude or to back down from the hard line it has taken publicly.   

I.                   The Sanctions 

The sanctions in question grew out of legislation passed at the end of 2011. The United States was expanding so-called “secondary sanctions” on Iran, meaning the threat of sanctions against third-country companies for engaging in certain transactions involving Iran, particularly its oil sector. The 2012 National Defense Authorization Act (NDAA), signed into law on December 31, 2011, included a provision requiring the president to restrict the opening of correspondent or payable-through accounts by a foreign financial institution (FFI) determined to have knowingly conducted or facilitated any significant financial transaction with the Central Bank of Iran or another designated Iranian financial institution. While ostensibly a banking sanction, in practice the provision in Section 1245 of the NDAA targeted Iran’s crude oil sales. The statute included a key exception that the sanctions would not apply with respect to a foreign financial institution, if the president determined that the country with primary jurisdiction over the institution had significantly reduced its volume of crude oil purchased from Iran in the previous 180 days.  

The administration and Congress adopted the same “significant reduction” exception into numerous subsequent sanctions, including the threat of sanctions on any person engaged in a significant transaction for the acquisition of Iranian petroleum products. Bowing to the combination of the threat of sanctions and intense economic engagement from the Obama administration, every major purchaser of Iranian crude received an exception for significantly reducing their purchases of Iranian crude. The European Union eliminated purchases of Iranian oil entirely, while other countries reduced at various rates, resulting in the removal of approximately 1.5 million barrels per day of Iranian crude from the market. Iran went from selling 2.5 million barrels per day in 2011 to only 1 million in 2014.

The Trump Administration has indicated it will seek immediate elimination of oil purchase from Iran, a less gradual approach than the Obama administration. Thus, if importers do not receive an exception under Section 1245 of the NDAA and other provisions, various activities necessary for the purchase of Iranian crude will become sanctionable, and central banks from purchasing countries could be sanctioned for payment for any Iranian crude, as Iran processes all oil payments for its oil through the Central Bank of Iran.         

II.                The Oil Market

The market reaction to the Obama-era sanctions on Iranian oil was clear. Oil prices remained consistently high. The average price of the US benchmark (WTI) during these three years was $96 per barrel, though prices spiked as high as $113 per barrel at times. It is possible that the removal of Iranian oil from the global market added as much as $10 per barrel to the price of oil during these years. 

When Iranian crude returned to the global market in January 2016, oil prices were already significantly lower than they were in 2011, hitting new lows as Iran ramped up exports to pre-sanctions levels. It took markets over a year and a half to recover from the crude oil glut that ensued. However, current global crude oil inventories have decreased, in part due to a multi-year production curtailment agreement between OPEC and non-OPEC producers, reflected by rising prices. 

Removing all of Iran’s 2.5 million barrels per day from the global oil market by November 2018 would exacerbate the tightening oil market and drive oil prices up significantly. In fact, the market is already feeling the impact of the administration’s policy. Initially, analysts anticipated that the Trump Administration’s sanctions would remove only 300,000 to 500,000 barrels per day of Iranian oil from the market. However, after seeing the administration’s new policies and the positive response from crude oil purchasers in Europe and India, analysts now anticipate that as much as 1 million barrels per day of Iranian oil will come off the market. Oil prices shot up between 1 and 2.5 percent the day the State Department announced plans to pressure importers of Iranian oil to zero out their purchases. These gains came despite Saudi Arabia’s plans to increase production in the next month.

The issue is compounded by involuntary declines in oil production from other producers. Venezuela, which has the largest crude oil reserves in the world, has been hit with such severe economic and financial problems that it can barely produce over 1 million barrels per day. Unrest in Libya has thrown at least 600,000 barrels per day in exports into jeopardy. Canadian oil producer Syncrude, which sends a significant amount of oil to the United States, is experiencing technical problems that will likely remove at least 360,000 barrels per day through the end of July. Some American oil producers in the Permian are planning to shut in wells because the pipeline infrastructure for oil and gas is at capacity. It is unclear how much oil will be impacted, but this news, when combined with known outages, has pushed oil prices significantly higher in recent days. 

American businesses and consumers will feel the financial impact of this unexpected increase in oil prices in the near term. At the same time, the US oil and gas industry will benefit from rising prices. Additional infrastructure is in the process of being built and transportation capacity in the Permian region is expected to increase significantly in 2019. Oil export facilities in the United States are also growing to accommodate higher exports and it is anticipated that some US oil will be able to take the place of Iranian oil on the global market. While the short-term economic effects of the new Iran sanctions policy will increase costs for consumers and businesses that could have political consequences in November, the US economy will reap some rewards in the long-term.

III.                The Risks

It is possible that importers could try to game the system and route Iranian oil purchases through “sacrificial lambs” with no US ties. The Chinese tried such a tactic in the early days of the Iran secondary sanctions by routing transactions with designated Iranian banks through Bank of Kunlun, which the United States sanctioned with little practical effect. In the long-term, the aggressive use of sanctions authorities could encourage countries to establish isolated channels to Iran using entities with no need for access to the US market and are willing to be sanctioned, potentially decreasing the effectiveness of US sanctions over time, making it harder for the United States to use sanctions to affect the behavior of our adversaries in the future. The United States could counter these efforts by sanctioning the central banks and other key entities at the end of the financial chain, but the prospect of imposing sanctions on the People’s Bank of China and other state-owned institutions could have grave political and economic consequences when they are severed from the US financial system. 

In the short-term, even if importers do find ways to skirt these sanctions, they will not be able to continue to purchase Iranian oil at current quantities, suggesting that at least 500,000 to 1 million barrels per day of Iranian oil will come off the market. Even with planned increases in oil production from Saudi Arabia and Russia, the administration’s Iran policy will push oil prices higher in coming months, which consumers will feel on their wallets, and politicians could feel at the polls. 

It appears that the Trump administration is aware of the impact its Iran policy will have on oil markets and is taking steps to encourage oil producers like Saudi Arabia to put more crude oil on the market. Even with assurances from the king of Saudi Arabia and other OPEC countries that they will increase oil production, these efforts may not be enough to counteract higher energy prices.

This Administration’s approach to the sanctions is undoubtedly more severe in its implementation than its predecessor's approach. These tactics could backfire by encouraging countries to create sustainable workarounds and are almost certain to increase the price of oil, at least in the short-term. The administration could have softened the immediate economic impacts by seeking a coordinated multilateral approach to the sanctions and blocking alternative channels for the business with Iran. That approach—pursued by the last administration—does not seem in the cards for the current one.

David Mortlock and Ellen Wald are senior fellows at the Atlantic Council Global Energy Center. You can follow Ellen Wald @EnergzdEconomy and David Mortlock @yotus44 on Twitter
7 Things Currently Driving The Price Of Oil Higher
(also on

Despite decisions by Russia and Saudi Arabia to quickly ramp up production, oil markets continue to be overwhelmed by news of worker strikes and production outages. That, of course, is bullish for the price of oil.

Despite US President Donald Trump's call for increased production in order to lower prices, markets are likely heading the other way. Here's a rundown of 7 regional events and why they'll propel oil higher.

1. Norway

Oil and gas workers on Norway’s offshore rigs voted to go on strike after rejecting a wage deal. At least one oil field operated by Royal Dutch Shell (NYSE:RDSa) has been shut down.

2. Libya

Unrest in Libya has caused significant disruption to that country’s oil output. Production there has fallen to only 527,000 bpd from previous highs of 1.28 million bpd. According to the chairman of the Libyan national oil company, the country's oil production is expected to decrease yet further.

3. Gabon

Oil workers at Total's (NYSE:TOT) subsidiary in Gabon voted to strike for 15 days, beginning July 9. Total produces 54,000 bpd in Gabon, out of a total of about 200,000 bpd.

4. Canada

Syncrude announced that its oilsands facility will not return to full capacity until September. Though 150,000 bpd are expected to come back online in mid-July, with another 100,000 bpd is expected to come back online in August, the remainder of the production may not return until mid-September.

5. Iran

According to Platts, Iran’s crude oil production fell to 3.80 million bpd in June. India is currently working to reduce its oil imports from Iran, as the US recently said that it will not issue any waivers to India to continue importing Iranian oil after sanctions take full effect in November. India is the second largest importer of Iranian oil after China.

6. United States

Oil production in the United States is holding steady at 10.9 million bpd. Lack of pipeline capacity in oil producing regions is expected to curb production growth for the remainder of 2018.

7. Venezuela

Oil production in Venezuela fell by another 6,000 bpd in June to a low of 1.30 million bpd, according to Platts. Venezuela is hoping that new investment from China in its Orinoco Belt region will help lift oil production soon. However, even if production grows in that region, it will barely offset expected declines in production from Venezuela’s other oil producing regions.

In late June, President Trump called for increased production in order to lower prices and Russia and Saudi Arabia have indeed been increasing their own production. Still, all of the above factors are offsetting increased production. This is why, at least for now, prices won't be dropping.

Trump Is Right About Russian Energy, And Here's What He Can Do About It 

(also on

One of President Trump's major points at the July 11, 2018 NATO meeting was that Germany is enriching Russia and making itself beholden to Russia by relying on Russian natural gas for most of its power production. He's right. But the United States could be in a position to help Europe wean itself off of Russian energy, if the U.S. could improve its natural gas transportation and export infrastructure.

In 2009, Russia now supplied Germany with about 40% of its natural gas needs. Now, Russia is responsible for over half of Germany's natural gas supply. In 2017 Germany imported over $21 billion in natural gas from Gazprom. Germany's reliance on Russia to keep the lights on has only increased since Germany decided to phase out most of its nuclear power plants after the Fukushima nuclear power plant meltdown in 2011. The ties between Germany and Russia also became close when former German Chancellor Gerhard Schröder got involved with Russian state controlled energy companies Gazprom and Rosneft. 

In 2017, Schröder was appointed chairman of Rosneft. By that point he had already served as chair of the Gazprom-dominated Nord Stream consortium. This group runs the Nord Stream pipeline that feeds Russian natural gas into Europe, and, of course, Germany, via the Baltic Sea. Nord Stream is in the process of negotiating with the EU to build a second pipeline, Nord Stream II, to deliver even more Russian natural gas to European power companies. Germany is a major proponent of Nord Stream II, which, if built, would make it effectively impossiblefor European countries to diversify their sources of energy away from Russian natural gas. When it comes down to it, Germany has not only enslaved itself to Russia's natural gas empire , but its insistence on the new pipeline will drag much of the rest of Europe into the same situation. With the new pipeline, Russian gas would be so cheap that no other source would be competitive.

Many European countries want to reduce their dependence on Russian natural gas, not increase it. They are looking to import natural gas from other sources and have built re-gassification terminals to import liquefied natural gas from elsewhere. The United States is in an excellent position to provide liquified natural gas to Europe, except that U.S. infrastructure and transportation facilities are not designed to handle the amount of natural gas Europeans need to get out from under the yoke of Russian supply.

The U.S. is a major producer of natural gas. Fracking in areas like the Marcellus shale region have produced a glut of natural gas on the east coast of the United States. Natural gas is also produced as a byproduct of fracking in shale oil regions like the Permian Basin in Texas. This gas is collected in pipelines and used in power plants and as feedstock in petrochemical plants. It can also be liquefied and exported, but lengthy permitting processes have made building liquefaction plants difficult. Moreover, waivers from the federal government are needed to export liquified natural gas to many of the most profitable markets--such as much of Asia--and these waivers have not been easy to obtainCurrently, the United States has only two liquefaction plants that can export natural gas to any country in the world - Cheniere Energy's Sabine Pass in Louisiana and Cove Point in Maryland. Both were opened in the last two years.

In addition to liquefaction facilities, the U.S. needs more natural gas pipelines to transport the gas within the U.S. before it is loaded on tankers (in liquid form) for export. If the U.S.commits to expediting the permitting and waiver process to build infrastructure now, perhaps it could convince Europe to buy its natural gas from North America instead of Russia.

US pressure a wake-up call for underspending NATO members

(also in Arab News)

President Donald Trump stirred up controversy last week when he started off the NATO summit in Belgium by slamming fellow members for their meager financial contributions to the joint defense organization. This shouldn’t have come as a surprise, considering that candidate Trump made similar comments when he was on the campaign trail in 2016. In fact, calling on NATO members to contribute more toward their own defense has been a common refrain from several US presidents. George W. Bush and Barack Obama both raised the issue with America’s allies. However, Trump has a chance to succeed where his predecessors failed because his tone is proving to be more forceful and he has demonstrated willingness during his 18 months in office to take bold actions against adversaries and allies alike.
Trump’s sometimes acrimonious and confrontational tone can be a shock to other world leaders, who are accustomed to more diplomatic approaches, at least in public. The president is counting on that shock to instill in the other NATO members the seriousness of his demands that they pay their share of the organization’s defense budget. Moreover, they have seen the hard stances he has taken against adversaries — Iran and North Korea in particular — and even against trading partners such as Canada, Mexico and Germany. NATO may still be important to him, but the president wants the other members to know that the US will not capitulate.
NATO, the acronym for the North Atlantic Treaty Organization, was conceived of as a military deterrent to the spread of the Soviet Union in Eastern Europe in the late 1940s. After World War II, Western European countries like Britain, France, Belgium and others found themselves in precarious economic and military situations as they struggled to rebuild their economies and physical infrastructure after the devastation wrought by Nazi Germany. The US, having suffered no domestic physical damage from the Germans, was well positioned to use its economic and military power to protect Europe and encourage the rebuilding of capitalist and democratic institutions. In March 1948, Belgium, the Netherlands, Luxembourg, Britain and France signed the Treaty of Brussels, in which they pledged to work together to prevent economic conflict. This treaty was a direct response to the communist takeover of Czechoslovakia and was the embryo for the NATO alliance that was formalized a year later. The North Atlantic Treaty included seven more nations, most importantly the US. The addition of America meant that it could be more than just an economic and political association — it could also be a military alliance.
Article 5 of the North Atlantic Treaty provided that the signatories agreed “an armed attack against one or more of them in Europe or North America shall be considered an attack against them all.” This was the crux of the alliance and represented a clear united defense force against the Soviet Union. In fact, the USSR formed its own military alliance with Eastern European communist states — called the Warsaw Pact — several years later. Unlike the Warsaw Pact, which was dissolved in 1991 after the collapse of the Soviet Union, NATO continued and actually expanded after the Cold War ended. It now has 29 members.
Trump entered this latest NATO summit demanding that fellow members shoulder more of the financial burden of defending Europe and each other. He labeled most as “delinquent” on their payments because they spend less than 2 percent of their GDP on defense, in violation of NATO guidelines. Trump specifically called out Germany, which has the largest economy in Europe, for failing to contribute the minimum amount. In comparison, the US contributes what amounts to more than 3.5 percent of its GDP. The only other countries that currently meet or exceed the targets outlined in the NATO guidelines are the UK, Greece, Estonia and Poland. Some NATO countries contribute almost nothing, and Iceland actually has no standing army. 
This inequality is not new. What is new is that Trump is using significantly harsher language than other presidents to try and compel NATO members to contribute a greater percentage to their own defense. He criticized Germany, insinuating that it acts against the organization since it purchases more than half of its natural gas from Russia and is supporting a pipeline that would make most of Europe similarly beholden to Russian gas. It is clear that Trump’s fellow NATO leaders were not happy with the president’s message. The president of the European Council, Donald Tusk, angrily said: “Dear America, appreciate your allies. After all, you don’t have that many.”
Some in the media and even at the meeting concluded that Trump seeks to end the 70-year alliance. This seems unlikely. As the meeting adjourned, there were plenty of pleasantries. According to Trump, member nations gave commitments to increase their contributions “substantially.”
After years of the US complaining about carrying the financial burden of NATO almost on its own, it is now possible that Trump’s strong rhetoric could convince these countries that it is time to contribute their share if they expect the US and others to perpetuate NATO and defend them.

Trump-Putin summit an appetizer for future relations

(also in Arab News)

The leaders of the United States and Russia are preparing to meet in the middle of the month for a summit in Helsinki, Finland. Presidents Donald Trump and Vladimir Putin surely have a wide of range of topics they could discuss and important issues of contention between the two countries to resolve. US National Security Adviser John Bolton has said the two world leaders will spend time alone, which means that no one (other than the interpreters) will know what is said. Yet the world wants to know, with so many key issues at stake between the world’s only superpower and its rival.
Neither leader will divulge plans and goals for the meeting, but the chances are it will be more about relationship-building than thrashing out the details of any agreements. Trump said just last week: “I’ve said it from day one, getting along with Russia and with China and with everybody is a very good thing. It’s good for the world, it’s good for us, it’s good for everybody.” Trump wants time with Putin to see whether the two can “get along” and work together in the future. The US president has been married three times, and he knows not to get engaged on the first date.
According to Russia, one subject not up for discussion is its 2014 annexation of the Crimea. The US under President Barack Obama opposed Russia’s expansionist actions in Ukraine from the start, but did virtually nothing to prevent them and did little to help the people of Ukraine. Trump’s administration has done more, such as its 2017 decision to approve the largest US arms sale to Kiev since before the invasion. However, Bolton met with Putin last week and the Russian made it clear there were no negotiations to be had on this topic. Bolton’s response was: “We’re going to have to agree to disagree on Ukraine.” This does not mean Trump will not bring up Crimea, but it seems that no agreement is possible on that topic.

Iran is an important issue between the US and Russia, but it is likely that the focus will be on Iran’s involvement in Syria, rather than the reinstatement of US sanctions on Tehran. Russian oil giant Lukoil recently suspended all operations there in response to the coming sanctions. Lukoil had been interested in partnering with an Iranian oil company to develop an oil field, but has since put all plans on hold. The Russian state-controlled company Zarubezhneft did sign a deal to develop a small Iranian oil field, and it is possible that Trump may bring up the matter, but it is unlikely as the deal is relatively minor.
Reports say that Trump will pressure Putin to push Iranian forces out of Syria. Russia is the most important ally of Syrian President Bashar Assad, and the US does not support him. However, Bolton recently said: “I don’t think Assad is the strategic issue. I think Iran is the strategic issue.” Trump might very well push Russia to help with the goal of dislodging Iranian interests from Syria, but that is a big request for a first meeting. Surely the topic will be broached, but it would be too optimistic to expect Putin to leave Helsinki committed to the expulsion of Hezbollah and Iranian forces from Syria.
The two could discuss the allegations roiling Washington that Russia “interfered” with the 2016 election. However, that conversation is not likely to get very far. The Democratic Party in the US is accusing Trump of working with the Russians to steal the election. The president vehemently denies this, and no evidence has been presented to justify the allegations; yet they persist. It would be awkward and a politically fraught move for Trump to even discuss the topic with Putin. He would be best to leave that to others who will not be accused — no matter how incredibly — of meddling in an investigation or coordinating with an accomplice.
NATO, on the other hand, is a likely topic. NATO is a joint defense organization established by European and North American countries during the Cold War to counteract the Soviet Union. Russia, like its Soviet Union predecessor, takes umbrage at NATO military drills and the presence of bases and missiles in Eastern Europe. This is an issue Russia would surely like to address, and perhaps Trump will hint at reducing the military exercises — as he did at the other end of the world during his summit with North Korea — but he will not withdraw NATO troops and weapons from Eastern Europe. Trump may actually use the Helsinki summit as a prod to America’s European NATO allies to pay a greater share of the cost of defense, a topic he regularly raises.
Energy markets are likely to occupy some of the discussion. Trump is concerned about the price of oil rising too fast and may pressure Russia to increase its production to help lower global prices. This is a topic the two leaders can agree on — keep that oil flowing from Russia. One energy issue they do not agree on is Europe’s dependence on Russian natural gas. The US is seeking to export more liquefied natural gas to help European countries diversify their sources of energy. Russia, on the other hand, is building more pipelines to deliver that natural gas to Europe in the hope of keeping its customers addicted to its supplies. Both sides will likely be interested in learning any details about the other’s natural gas plans.
We are not likely to see any grand agreements come out of this Helsinki meeting, but the tone will tell us a great deal about the future of Russian-US relations. Both men will try to gauge each other’s character. They are used to big stakes negotiations and high-level talks, but this meeting will just be an appetizer. 

About Ellen R. Wald, Ph.D.

A consultant and columnist on geopolitics and energy markets, Ellen writes regularly for several major publications. She is the president of Transversal Consulting, a Senior Fellow at the Atlantic Council and an adjunct professor of social science at Jacksonville University where she teaches Middle East history and policy classes. 

Dr. Wald is a frequent commentator on radio and television programs. She offers discussion and analysis of contemporary energy issues, with special emphasis on the Middle East. To arrange a media appearance or to discuss her consulting services, please contact her through her website.
About "Saudi, Inc."
“Saudi, Inc.” presents the history of Saudi Arabia through the central figure of Aramco, the oil company that brought riches, success, and regional dominance to its ruling family, al Saud.  It will be released in 2018, as Saudi Aramco prepares to launch its much-anticipated IPO, expected to be the largest in history with a possible valuation of up to $2 trillion. The book debut will also come amid the Kingdom’s massive investment in its Vision2030 plan for economic diversification; the rebirth of an economic and diplomatic relationship with the U.S. worth hundreds of billions of dollars in investment in both directions; and preparation by the next generation to take leadership positions in the Kingdom – transforming society, business, and the state.
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Reporters interview Saudi oil minister and OPEC President Khalid al-Falih before the November, 2017 OPEC and Non-OPEC joint meeting
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