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The writer is founding director of the Center on Global Energy Policy and a professor at Columbia University. He was previously senior director for energy and climate change at the US National Security Council during the Barack Obama administration.
In March 2012, Israeli Prime Minister Benjamin Netanyahu arrived in Washington to press a US president on slowing Iran’s nuclear ambitions. Inside the White House, the dilemma was stark. The US wanted to tighten the economic noose on Tehran, but without triggering an oil shock that would hit consumers, derail a fragile recovery and imperil Barack Obama’s re-election.
Almost 14 years later, Netanyahu again came to Washington to urge a very different US president to neutralise the Iranian threat. Once again, the US had to weigh the strategic case for force against the risk of an energy shock. What separates 2012 from 2026 is not just the cast of characters but the transformation of America’s energy position. The shale revolution has fundamentally altered how much global energy markets constrain US foreign policy.
The recent attacks on Iran, and Tehran’s response, have produced the largest oil supply disruption in history, sending prices for a time as high as $120 a barrel. Yet as severe as this shock has been, it also serves as a revealing stress test of a new reality: US statecraft is no longer nearly as constrained by energy markets as it once was.
In 2012, the US was far less equipped to absorb even a small disruption. US crude production averaged just 5mn barrels a day in 2009; last year it approached 14mn. Two decades ago, the US imported about 60 per cent of its oil consumption. Today it is a net exporter and the world’s largest exporter of liquefied natural gas.
Oil prices were even more of a constraint during Netanyahu’s 2012 visit. Brent then averaged $125 a barrel — roughly $180 in today’s dollars — while the US economy was still recovering from the financial crisis. Squeezing Iranian supply risked directly impacting US households and businesses. Obama therefore resisted calls to halt Iranian exports, instead constructing a sanctions regime built around gradual reductions that gave markets time to adjust. A disruption like this year’s — nearly 15 per cent of global supply — would have been unthinkable.
Oil remains globally priced, and American motorists are not insulated from spikes, but the US economy is far more resilient than it once was. First, this year’s price impact has been tempered by slack in the global market. Before the attacks on Iran, the International Energy Agency projected that supply in 2026 would exceed demand by nearly 4mn barrels a day, due in part to surging US production.
Second, the macroeconomic effect of an oil price shock in the US is much smaller than it used to be — reducing US GDP by about 0.1 percentage points for every $10 increase in the oil price. Higher prices now transfer income to domestic producers, workers and shareholders rather than abroad.
Third, while benchmark prices are set in global futures markets, the cost of physical barrels during acute shortages can diverge sharply across regions, hitting import-dependent regions such as Europe and Asia harder. The US, as a major producer, is more insulated. Today, the price of US crude for physical delivery is roughly equal to futures benchmarks; European buyers have been paying a premium of $30 or more per barrel for physical delivery.
Over time, however, shortages abroad will transmit back into US markets. As European and Asian refiners bid for US exports, domestic prices must rise to keep barrels at home. Even so, the current crisis suggests the US enjoys a window of several months during which it is far less exposed to Middle East supply disruptions than other major consumers. This improved resilience is both a story of rising supply and, more importantly, the declining role of oil in the US economy. Since the 1970s, output has expanded nearly fourfold while oil consumption has increased only modestly. The divergence is even more striking in natural gas. The disruption to LNG flows through Hormuz has pushed prices in Europe and Asia to between $15 and $20 per million British thermal units. In the US, prices remain below $3.
Energy still constrains US foreign policy because rising prices contribute to inflation and consumers still feel pain at the pump. But oil shocks are now less a pure drag on national income than a distributional shift: most Americans lose, while a smaller group of producers and investors gains. The US also now has policy options it once lacked to offset the damaging effects
For decades, one of the most important constraints on the use of economic and military coercion in the Gulf and other oil-producing regions was the damage such actions could inflict on the US itself. As that constraint weakens, so too may the incentive for restraint. Others should prepare for a world in which energy crises are less of a brake on American power than they once were.
