/America Is Now an Oil Powerhouse. That May Have Liberated Trump to Attack Iran.

America Is Now an Oil Powerhouse. That May Have Liberated Trump to Attack Iran.

Iran’s huge oil industry is less of a deterrent than it used to be.
Photo: STR/AFP/Getty Images

Oil-supply shocks are still bad for the U.S. economy. But they’re not as bad as they used to be, and that change has major implications for American foreign policy. We no longer face as strong imperatives as we once did to intervene in the Middle East in ways that protect the flow of oil. But, as we saw with last week’s air strike that killed Iranian general Qassem Soleimani, we also have more freedom to intervene in ways that may interfere with the flow of oil.

A key economic feature of the 1970s was oil-driven recessions: Turmoil and embargoes in the Middle East led to restricted supplies of gasoline and rising prices at American gas pumps. Spending on energy went from less that 8 percent of the U.S. economy in 1970 to more than 13 percent in the early 1980s, and the need to pay more for gas meant less room to pay for anything else.

Spiking oil prices were key factor in the 1970s’ stagflation, where prices rose but economic output performed poorly. The need to ensure reliable supplies of petroleum at stable prices has been a key driver of our foreign policy in the Middle East for decades. But there have been three big changes since the 1970s that have made the Middle Eastern oil trade less economically important for us than it used to be.

First, energy spending is a much lower share of the economy than it used to be. According to the U.S. Energy Information Administration, spending on energy made up 5.8 percent of the U.S. economy in 2017, less than half of what it was in the early 1980s. With energy spending making up less of the economy (and therefore less of household budgets), an increase in energy prices tends to be less painful to consumers than it might been in the past.

Second, the U.S. has become a much larger producer of oil and gas. U.S. oil production has risen dramatically, from 5 million barrels a day in 2008 to 13 million barrels and rising at the end of last year. After decades as a major net importer of petroleum products, our imports and exports are now approximately in balance. Because of this, disruptions in the global oil supply chain have less effect on gasoline-pump prices in the U.S. The effects are not reduced to zero — we are not truly energy independent, because oil prices continue to be set on a global market — but our increased production, and our flexibility to further increase production when global prices rise, means we are not as captive to the global oil market as we used to be. And this is likely to continue to improve: The rise of renewable energy, improved gas mileage, and electric vehicles are likely to further insulate our economy from oil shocks going forward.

Third, the expansion of our oil-and-gas sector means more Americans than before actually stand to gain from rising energy prices, either because they work in the oil-and-gas industry or because they work in industries that serve that industry. Of course, there are other industries that are significantly harmed by higher gas prices (like transportation), but the closer-to-offsetting gains and losses mean higher gas prices put less of a drag on the whole economy than they used to.

This is an important economic story, but it also has important international-relations effects, for better and worse, that we are seeing play out in the world this month. Less dependence on oil imports means less reason for “war for oil,” and more broadly less reason to aim our Middle East policies at ensuring stable oil supplies. Our reduced energy dependence should produce opportunities, for example, to back away from our awkward alliance with Saudi Arabia, because we don’t need the Saudis as much as we used to.

But the flip side of that story is that American policy-makers are now more free to take actions in the Middle East that might tend to disrupt the oil supply. In a more 1970s-style oil environment, President Trump might have been reluctant to upend the Middle East with a strike like the one that killed Soleimani for fear of what a military escalation in the region could do to the oil trade, gasoline prices, and his reelection prospects. An American economy more insulated from oil-price shocks gives him more room to escalate — and could surprisingly be a reason that the U.S. gets sucked farther into Mideast fighting, rather than serving as an opportunity to disengage.

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