Oil and U.S. Foreign Policy

Increasing global oil supply to weaken oil prices in the face of the war in Ukraine is, for the United States, not just a question of capacity and capability in oil-exporting countries but also a question of competing foreign policy priorities. A review of three sets of interactions and activities between U.S. officials and foreign counterparts over the past several weeks shows the complex politics of foreign oil production for the United States. The first is a narrow easing of sanctions on Venezuela. The second is the ongoing saga of the long-delayed and possible return by Washington and Tehran to the Iran nuclear deal, and the final is an attempt to improve relations with Saudi Arabia’s crown prince. The political difficulties of swift or substantial movement of any of these are discussed below.

As we have suggested for several weeks, last week, the Biden administration issued a “narrow license” that would allow Chevron to begin talks with the Venezuelan government about possibly restarting production in that country at some point in the future. This decision was tied to the beginning of talks between opposition groups and the Venezuelan government about again sitting down to discuss the country's political future. These talks were suspended by the Venezuelan government in October 2021. The Biden administration described the sanction easing as narrow, dependent on the talks, and time-limited. The administration immediately received pushback from senators of both parties who object to the Venezuelan government and only want to see sanctions easing in response to concrete steps by Caracas. As we have written before, we believe easing sanctions on Venezuela would add about 40,000 b/d to the market by the end of this year. It would also reroute barrels headed to China to the U.S. and India.

The ongoing negotiations regarding the U.S. and Iran returning to the nuclear agreement were in the news over the past few days. A representative of the European Union went to Tehran to see if they could find a way to bring the sides together. The head of the International Atomic Energy Agency, tasked with monitoring the nuclear deal, indicated that its technical teams had discovered enriched uranium residue in locations where Iran had not declared enrichment activities – a potential red flag for Washington and the European participants to the agreement. In addition, reports out of the Middle East that Iran was ready to compromise on final sticking points were denied by Iran. Tehran indicated that the “ball was still in Washington’s court” on Iran’s demands, including removing the Iranian Revolutionary Guards Corps from Washington’s sanctions list. As Washington has indicated, time is running out in terms of Iran’s progress toward a nuclear weapons capability. While the Biden administration might want more Iranian oil on the market, it is highly unlikely that Washington is going to be willing to compromise central nuclear nonproliferation policy goals for potential future Iran oil export increases. As we have written before, we believe a return to the nuclear agreement adds between 500,000 and 1.0 million b/d to the market fairly quickly.

Finally, and in a relationship that is linked closely to the Iranian nuclear agreement, U.S. and Saudi officials have been meeting more regularly to prepare for a potential in-person meeting between President Biden and Saudi Crown Prince Mohammed bin Salman. The relationship between the two long-time close partners has been chilly since President Biden called Saudi Arabia a “pariah” with “no socially redeeming value.” Riyadh also did not support the Iran nuclear deal, and it does not want Washington to revive the accord. President Biden also faces significant domestic opposition on both the Iran negotiations and the U.S. relationship with Saudi Arabia. Better relations between the U.S. and Saudi Arabia would likely lead to more Saudi crude oil on the market, but the connection between the two is tenuous.

Trade-offs between the U.S. foreign policy objectives in these three issue areas and the desire for more crude oil supply to advance Washington’s anti-Russia policies will be complicated and contentious and, thus, made at the very highest levels in Washington.