Oil tankers: Such ships, and their cargo, may hold the key to future cooperation between the U.S. and Russia

Jacek Popiel

(Editor’s Note: This is the final installment of Jacek’s examination of U.S. and Russian relations.  Parts 1 and 2 are here and here.)

Russia’s rejection of Marxism has given her and the U.S. three options in their mutual relations:

• Return to a friendly coexistence such as existed before 1917.
• Continue playing Cold War games.
• Actively if not amicably cooperate in their mutual interest.

In World War II cooperation was imposed, despite ideological differences, by the pre-eminent menace of Nazi Germany. A similar incentive may arise in today’s Middle East.

During the Cold War years both powers sought control over this vital region and its key resource, petroleum. The U.S. supported Israel, Iran (until that country’s revolution) and Saudi Arabia. The Soviet Union’s influence extended over Egypt, Syria and Iraq. In the 1980s the U.S. and Soviet Union conspired to settle the Iraq-Iran war, preventing an outright Iranian victory due to concerns over radical Shia Islam.

The Soviet Union’s collapse gave the U.S. full freedom for two decades. It maintained its opposition to Iran and sought to control Afghanistan and Iraq. The American invasions of those two countries, seemingly successful in the short term, created the conditions for future instability.  Artificial borders dating from World War I were maintained, religious enmities dating back to the early decades of Islam flared up, and little of the oil wealth in the region ended up in the pockets of ordinary people.

At this point our Middle Eastern “ally” Saudi Arabia launched two questionable initiatives:

The first was an attempt to unseat the ruling (and Shiite) Assad family of Syria, to replace it with a Sunni regime. This has produced a four-year Syrian civil war, a refugee crisis, and the rise of out-of-control extremist groups.

The other was to raise oil production – both its own and OPEC’s – to a point where global oil prices fell by half. The goal here was to increase Saudi market share and pricing power by driving the American “fracking” companies out of business.

So far both policies have failed. Iran jumped in to help Assad. Russia saw its last foothold in the Middle East (Assad’s Syria) and its vital oil/gas business threatened by Saudi actions. Russia has acted to ensure Assad’s survival, further aggravating a regional civil war centered on Syria but spilling over into Iraq and possibly into Iran and Turkey as well. With the U.S. reluctant to commit ground troops, the Saudis are likely to become increasingly isolated – and desperate.

But oil itself is an even bigger issue.

When Saudi Arabia crashed the price other producers responded by pumping more. Global supply rose by 1.5 to 3 MBPD (Millions of Barrels Per Day) above demand, and the surplus will grow:

• Iran intends to expand its exports by 2 MBPD as soon as sanctions are lifted next year.
• Iraq, now pumping 4 MBPD, plans to reach 8 MBPD and has the reserves to support it.
• Potential recession in China could reduce its oil imports by up to 2 MBPD. Recessions in other major economies loom as well.

The global oil surplus could thus reach 10 MBPD in the near future. Another factor is adding urgency: storage.

The surplus oil now being produced must be put somewhere. The world’s tank farms are filling up, with only the U.S. with significant room left. Growing numbers of tankers are idling at sea or sitting at anchor, waiting to unload. Once storage facilities are full – possibly in the first quarter of 2016 – the price of crude could crash to around $ 20/barrel – an untenable situation for those economies that depend on oil exports for their liquidity and strength.

The problem is simple: to restore prices (and the finances of producing nations) something like 10 MBPD must be taken off the market. “Sharing” the cuts has never worked because everyone cheats. It would be easier if all concerned ganged up on one or two big producers.

Only three countries produce 10 MBPD of crude: the U.S., Russia and Saudi Arabia. The first two will never cut production, so Saudi Arabia is the likely fall guy.

It is also, as oil goes, the sitting duck. Its oil exports travel through two choke points: the Strait of Hormuz, which Iran controls; or the even narrower Bab el Mandeb at the south end of the Red Sea. That can be shut from Western Yemen – where Iran’s Houthi allies are already at war with the Saudis.

In addition the population of the Saudi oil producing region is Shiite, giving Iran additional leverage.

It is entirely possible that Iran, faced with collapsing oil prices and the resulting economic ruin, could take the risk of blockading Saudi exports. All other producers would applaud the move. But such situations are unpredictable. The stand-off could lead to the two arch-enemies taking each other’s (and Iraq’s and Kuwait’s) oil facilities out, creating an energy crisis that could lead to global economic depression.

This leaves the U.S. and Russia with three options:

• They can back their respective allies, Cold War style… and face an unpredictable shoot-out in the Persian Gulf (and elsewhere) – maybe starting World War III.
• They can sit back and “let happen what may.” A “bad” ending would please Russia as its oil would skyrocket in price. But the U.S. – which imports 6 to 8 MBPD, cannot afford it.
• They can agree, World War II style, to work out a solution, with the tacit or overt backing of China and Japan.

The matter is of the utmost urgency: time (and storage space for oil) are quickly running out – most likely long before next November’s U.S. presidential election.

For all the anti-Russian posturing in the United States, it’s time to find common cause again.  Stability in the Middle East – and predictability in oil exports – is such a common cause.  It should unite the U.S. and Russia – if only the leadership of both countries exercises reason and restraint.

Jacek Popiel was born in Poland and educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant. His book “Viable Energy Now,” grew out of his military and international business experience and his professional involvement with energy issues.