Recently enacted Western sanctions will ultimately have little to no impact on long-term crude oil pricing. Diplomatic trading sanctions have historically been an ineffective tool used by political leaders for largely domestic policy consumption. The goal of course is to change the policy of another nation state, yet rarely have they succeeded. President Kennedy enforced sanctions that remain to this day against Cuba. President Carter withdrew from the Summer Olympic Games in Moscow and now, the West seeks to curtail Iranian exports of oil by up to 50 percent.
Our nation has reduced imports of Iranian oil ever since the Iranian hostage crisis over thirty years ago. A reduction in Iranian oil, however, could translate into less worldwide supplies, thereby driving up the cost of crude. That will not happen because numerous countries have been exempted from the sanctions and because other producers have already began making up for any resulting shortfall. In sum, the sanctions sound good on paper, but as enacted, are largely ineffective at actually curtailing Iranian oil and will be even less successful at changing Iranian behavior.
We are already seeing crude oil prices returning to pre-event levels. So what caused the sudden spike?
Recall that when sanctions were announced, it appeared as though Iranian oil might actually come off the market. That, in combination with Iranian threats to close the strategically important Strait of Hormuz through which all Persian Gulf oil flows, helped traders and brokers push pricing models higher. The markets looked for political signals from Washington to counter Iran’s claims but unfortunately, the U.S. played right into Iran’s hands by failing to respond with a sufficient diplomatic and military show of force.
Iran’s military lacks the sufficient naval assets to actually block the Straits and while they could cause a significant disruption, Iran is not about to risk an all-out confrontation with friends and foes alike over closing down oil production to the Gulf States. Instead, Iran was able to set off a feeding frenzy among the markets, which pushed oil well beyond sustainable levels
Iran’s foreign policies, and the West’s weak response, did cause harm to our economy for millions of consumers and businesses. Moreover, the temporary price spikes also helped cool world economies. The fact that Iran was able to produce this type of negative reaction dramatically underscores the need to continue to reduce our dependence on overseas oil. In fact, energy prices have already reversed course, closing markedly higher based on new reports that Iran’s National Security and Foreign Policy Committee has drafted language aimed at blocking oil shipments through the Straits based upon any countries supporting the latest round of sanctions.
President Obama must capitalize on the opportunities to offset overseas oil by making strong policy statements aimed at ensuring the world that the U.S. will not allow Iran to block any shipments through the Strait. Moreover, the administration must embrace additional production of North American energy sources. Whether intentional or by accident, our domestic and foreign policies must take into account the actions of other nation states and the most effective way to reduce the effectiveness of world events on energy markets is to embrace additional production of North American resources.
Canada and Mexico have long supplied the bulk of our nation’s oil, and Canada in particular, with vast amounts of oil reserves stands ready to completely replace imported oil from Saudi Arabia or Venezuela which is why embracing North American projects such as Keystone XL are vital to our interests. Not only would this $7.2 billion privately funded project provide a secure source of oil from our close ally, it would also create tens of thousands jobs. We must invest in our future and our security, and approving realistic infrastructure programs such as Keystone XL is a first step toward improved security.