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Oil Addiction


OPEC’s New Management

August 15th 2011

Contributors / Staff - Gal Luft

The recent appointment of Islamic Revolutionary Guards veteran Rostam Ghasemi as Iran’s new petroleum minister is not only the Islamic Republic’s latest poke in America’s eye but it is also harbinger of things to come with respect to Iran’s petro-politics. Ghasemi, a notorious hardliner and the head of the economic wing of the Guards, is personally sanctioned by both the EU and the US. In his new position he will be able to do exactly what his patron Mahmoud Ahmadinejad explained in his nomination support speech before the Majlis: “transform this complex [oil industry] in line with national interests.”

Transforming Iran’s oil industry in line with national interests begins in the Vienna headquarters of OPEC. There, Ghasemi’s first goal would be to continue to erode Saudi Arabia’s hegemony in the cartel. Iran is currently the rotating president of OPEC which means that for the next few months Ghasemi is the oil cartel’s de facto president. In this capacity he will be able to influence decisions on production quotas and crude price negotiations. In recent months, Iran has taken upon itself to challenge Saudi Arabia which has traditionally called the shots in Vienna. Last June, in what was described by Saudi oil minister Ali al-Naimi as one of the worst OPEC meetings he has ever attended, Iran redefined greed. Ignoring the fragility of the world economy it led a radical wing within OPEC to vote against Saudi Arabia’s plan to increase production. All of a sudden, inflated as it was, the Saudi target price of $100 looked like a bargain.

The rivalry within OPEC is not only about geopolitical domination or the ancient schism between Sunnis and Shiites. It is also about economic survival. While both Iran and Saudi Arabia are heavily dependent on oil revenues they differ in the degree of dependence. Saudi Arabia currently needs a breakeven crude price of roughly $90 a barrel to balance its budget. Iran needs roughly $140 a barrel oil to stay afloat. This spread of $50 a barrel will be the cause of a tug-of-war within the cartel with the radical flank spearheaded by Iran and Venezuela pushing for high as possible oil prices while the more moderate group led by Saudi Arabia is content with ‘only’ $90–$100 a barrel. In order to win this tug-of-war, Ahmadinejad needed a strongman in Vienna—and Ghasemi is someone who knows something about arm-twisting.

The appointment of Ghasemi means that consumers seeking oil price stability can no longer find a sympathetic ear in Vienna. The solution can only be in Washington. President Obama’s decision to release oil form the Strategic Petroleum Reserves was more of a one-time stunt than a sustainable policy. Equally futile is his more recent decision to raise mandatory fuel efficiency standards of new vehicles to 54.5 mpg by 2025. There is nothing wrong with cars that travel more miles per gallon but efficiency alone does nothing to impact the global price of oil as OPEC cuts production in response to static drops in consumer demand. The U.S. Department of Energy recently claimed that U.S. oil imports declined from 60 percent in 2005 to 50 percent in 2011. But if America truly became less dependent on oil imports, it did not translate into lower price at the pump. To the contrary, the price of a gallon of regular gasoline in 2005 was $2.30. Today it’s nearly $4. In other words, something is wrong with our method. We supposedly did the right thing: we became more fuel efficient. So why are we being rewarded with a penalty of $1.70 per gallon at the pump?

What is wrong is that static demand reduction doesn't work very well in the face of a cartel that can respond with a static cut in supply. Outmaneuvering the cartel requires the ability to respond dynamically—on the fly—to price shifts by replacing its product with another good or service. Drivers can't rapidly change the fuel economy of their vehicles, but, with vehicles that enable fuel competition they could quickly change what fuel their vehicles use.

In the 2005–2011 period the U.S. did very little to address the virtual monopoly of oil over transportation fuel. Over those six years, 85 million new petroleum-only vehicles rolled onto U.S. roads, effectively extending the stranglehold of oil over our economy by two full decades. Changing this dynamic will require an Open Fuel Standard which would ensure that most new cars sold in the U.S. are warranted to run on at least some subset of non-petroleum fuels, be they liquid, gases, or electricity, in addition to or instead of petroleum based fuels. Liquid fuel flexibility would cost automakers on the order of $100 per vehicle to enable, and opens cars to fuels made from natural gas, coal, or biomass.

As long as our cars block fuel competition, people like Rostam Ghasemi will continue to hold the key to America’s prosperity and security and bad actors such as Iran will become stronger, not weaker.

Cutting Edge energy security commentator Gal Luft is executive director of the Institute for the Analysis of Global Security and co-editor of Energy Security Challenges for the 21st Century.

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