Expanding U.S. Energy Supplies: The Not-So-Secret Weapon in Iran Sanctions Success

Former U.S. National Security Advisor Thomas E. Donilon spoke at Brookings yesterday, in a conversation with John L. Thornton, chairman of the Brookings Board of Trustees, focused on the Obama administration’s effort to rebalance U.S. foreign policy toward Asia, and the challenges posed by events in the Middle East and elsewhere for the implementation of this strategy. 

The final question, posed by a member of the audience, concerned energy diplomacy — specifically whether Washington can and should utilize its newfound energy resources to help advance its foreign policy objectives. Donilon’s response highlighted the significance of changing energy markets and, in particular, new American production of oil and gas as a crucial enabling factor in the intensification of sanctions on Iran — measures that are widely credited with persuading Iranian decision-makers to adopt a more constructive approach to nuclear negotiations and to implement a temporary freeze in the most sensitive nuclear activities.

Donilon acknowledged yesterday that the administration carefully studied the prospective impacts of measures targeting Iran’s Central Bank that, together with a similarly-timed embargo on Iranian oil imports adopted by the European Union, have reduced Iran’s crude exports by more than half. And those studies proved accurate; the rapid erosion of Iran’s oil (crude and condensate) exports from 2.5 million barrels per day (bpd) in 2011 to 1.5 mbpd in 2012, did not spark a crisis in global markets or provoke rapid escalation in the price of oil.

For its part, Tehran mostly failed to anticipate the ability of the world economy to absorb a significant reduction in its energy exports. Iran’s leadership has traditionally dismissed sanctions as counterproductive and an asset to the country’s indigenous capabilities. Tehran may have also anticipated that the measures would cause some transatlantic friction, along the lines of previous U.S. extraterritorial sanctions aimed at Iran, but the availability of alternative supplies at reasonable prices (and the use of broad waiver authority by President Obama) facilitated robust global adherence to the punitive measures against Iran.

Indeed, as the sanctions regime intensified over the course of the past eight years, even Iranian pragmatists argued that the impact of new measures would be limited by Western anxieties about energy security and averting recessionary pressures on their own economies.

By now, of course, such bluster has mostly faded, and while Iran’s supreme leader continues to advocate a “resistance economy,” his government is working via multiple avenues to revive Iran’s energy influence and revenues — most notably through the diplomatic engagement with the nuclear negotiations, but also through efforts to enhance Iran’s notoriously unattractive contract model for foreign investment in the energy sector. Both moves represent a tacit, and unfortunately belated, affirmation of the new realities of worldwide energy markets that Donilon discussed in his remarks yesterday.

Below, I’ve excerpted Donilon’s remarks on Iran and the opportunities that changing energy markets may create for U.S. diplomacy around the world, including in current hot spots such as Ukraine. You can listen to the entire discussion here (the remarks below begin at about the 1:15 mark, near the end of the video.)

“I think that’s a really good question, and I’d say the following things about it. One, is that when the Obama administration came into office, we were told, for example with respect to natural gas, that we would need to import twice as much as we were importing at that time. And we were given a lot of other predictions. Almost every one of those predictions turned out to be wrong, and indeed the energy picture we thought we were facing in 2007-2008 has really been kind of flipped on its head.”

“Number two, I think everyone here knows the facts now that we’re soon to be the largest producer of oil in the world, we’re already the largest producer of natural gas in the world, and we’re by far the cheapest natural gas in the world right now.”

“Next…is that I think we’re just beginning to understand the geopolitical aspects of this. There’s been a lot of work done on the economic aspects of it, there’s some debate about the scale of economic impact. But I think everybody agrees its all for the good, in terms of increased economic activity, lower cost for U.S. consumers, making manufacturing more efficient and effective in the United States, making us more of a magnet for manufacturing, particularly for gas-intensive industries. And that’s all to the good for the U.S.”

“Next though is on the diplomatic side, what are the impacts? Again, I think we’re just wrestling with this, we’ve already seen some. And I think that they’re two or three-fold. Number one is that it gives the United States more room for maneuver, first point, and the example of that, of course, is Iran. You know, we’ve put in place these very intensive sanctions against Iran, and you can imagine the discussions we had when we were doing this, because the key sanctions were aimed at trying to reduce Iran’s ability to sell its oil in the world, and indeed we reduced it by half.”

“Now, when we were having these discussions of course, you would imagine, we would ask ourselves and again my economic colleagues would come in and say…let’s think about this, we’re in an economic downturn, tight markets, what is the impact going to be on the United States?”

“And we were able to do an analysis and go ahead with respect to those sanctions, which again reduced the Iranian exports by half, because we had increased our own production by a million barrels per day, and it really did give us that maneuver to be able to go and do the Iranian sanctions. That’s first.”

“Second, I really do think that there are opportunities for the United States to assist its allies and partners around the world in terms of energy supply. We’re already having an impact. To the extent that Qatar and other supplies don’t send gas to the United States, right, that’s additional supply and diversification of supply for Europe and elsewhere in the world. And I think that’s already having an impact.”

“With respect to Europe specifically, that’s a longer term project, but I think one that’s absolutely worth pursuing. As I said, we’re already having an impact in terms of diversification and quantity of supply and we’ve got some approval in the United States for export of natural gas. I’m obviously for that. And if you travel around the world, you’ll see in Asia, Japan, India, and Europe you’ll see allies and partners looking for additional supply from the United States and I think we should look to doing that supply, frankly, going forward.”

“In Europe it will take a while because you have to build the facilities. You have to look at the cost, the differentials between pipeline provided gas and gas that’s shipped. And I think that … we should look at sharing technology, with respect to fracking, and they can look to additional sources in Europe. Over time, if you can globalize the gas market, you can break what is really tough in Europe which is these contracts tied to oil prices, long-term contracts, and over time those contracts will fall off, I think we can have additional supply and the United States can play, I think, an important role in diversifying and helping our allies and friends around the world. I also think the United States, by the way, should look at lifting the ban on oil exports given our level of production.”

“So that’s a long answer to your question, so that I think that in fact, this is all positive for the United States, it provides us with more diplomatic room for maneuver, in the case of Iran for example, when we were trying to put sanctions on. And I think it provides us with more opportunities to work with partners and friends, including a country like Ukraine but Europe generally with respect to gas supplies over the long haul. And…that’s a real circumstance for Gazprom and the Russian suppliers to have to confront, frankly.”

“So I would do all of the above there, and I think it’s all available to the United States, frankly. Now, it involves us having good regulatory regimes here so that we can continue our shale gas process, it involves, you know, obviously doing this in a sensible way, but I would look to accelerating it on the natural gas exports side and I would look to reconsideration of the oil export ban as a way for the United States to be a supplier and again to work with allies and partners around the world directly on these things.”