Center for a New American Security

Iran may be attempting to breed uncertainty in the global oil market in an effort to drive up prices and insulate itself from tightening economic sanctions, including those against Iran’s Central Bank.  

On Sunday, Iran’s semi-official Fars news agency apparently reported that Tehran suspended a 500,000 barrel oil shipment to Greece. Reuters reported the story, citing that Iran’s Fars new agency stated, “Oil tankers that had come to transfer 500,000 barrels of Iranian oil to a refinery in Greece had to go back empty-handed after Iran refused to give the shipment.” However, as Reuters reported, Fars did not give a source for its report, and a statement from the Greek refiner Hellenic Petroleum, which was reportedly the intended recipient of the oil shipment, denied that Iran had suspended any oil delivery. “That has nothing to do with us ... all supplies from Iran have been processed normally,” a refinery spokesperson told Reuters.    

The report follows a string of recent incidents that should raise concerns that Iran may be attempting to sow uncertainty into the global oil market in an effort to rebuff attempts to coerce Tehran to suspend its suspected nuclear weapons program. Last week, Iran made headlines after suspending oil shipments to Great Britain and France, which analysts say contributed in part to the highest oil prices in nine months. Yet, as reports noted, Iran’s suspension of oil shipments to Great Britain and France would have little effect on supply because Britain had not imported oil from Iran in six months and France only imports approximately 3 percent of its oil from the Islamic republic. Nevertheless, oil prices increased, in part as a “reflection of concerns about the further escalation in tensions between Iran and the West,” says one commodities expert, adding that "Banning the tiny quantities of exports to the U.K. and France involves very little risk for Iran – indeed quite the opposite, it catches the headlines and leads to a higher global oil price, which is something Iran is very keen to encourage."

The United States and Mexico have come to an agreement that would allow both countries to drill for oil and natural gas along their maritime border in the Gulf of Mexico. According to a U.S. Department of Interior press release, the Transboundary Agreement “removes uncertainties regarding development of transboundary resources in the resource-rich Gulf of Mexico” and opens up approximately 1.5 million acres of the U.S. outer continental shelf to exploit the estimated 172 million barrels of oil and 304 billion cubic feet of natural gas. “This agreement makes available promising areas in the resource-rich Gulf of Mexico and establishes a clear process by which both governments can provide the necessary oversight to ensure exploration and development activities are conducted safely,” Secretary of the Interior Ken Salazar said.

The U.S.-Mexico agreement was penned a week after Mexican oil regulators cautioned that Petroleos Mexicanos – or PEMEX, the national oil company – is ill prepared to manage a serious offshore oil spill. According to a February 15, 2012 report from The Wall Street Journal:

The regulator's chief, Juan Carlos Zepeda, said Petróleos Mexicanos has relatively little experience with deep-water drilling, much less with the ultra-deep wells—those at depths exceeding 6,000 feet—that it could tackle as soon as next month. Pemex plans to drill as many as six deep-water wells this year, including the two ultra-deep wells, more than at any time in its history. 

The U.S.-Mexico agreement provides a framework for both countries to conduct joint inspection of the others’ oil rigs in the Gulf of Mexico, in part intended to ensure safety standards are met.  The agreement also allows U.S. companies and PEMEX to jointly develop oil and natural gas reserves in the transboundary region, which could provide an opportunity for U.S. companies with a long history of offshore oil drilling to cooperate and share lessons learned with PEMEX. “Coordination and sharing communications, training, personnel, equipment and technology are essential for safe and productive drilling,” said Jorge Piñon, a former president of Amoco Oil Latin America and a current research fellow at the University of Texas, in an interview with The New York Times on Monday.

There is a lot of chatter this morning about the potential for gas prices to hit $4 or $5 a gallon by Memorial Day, which could undermine stronger U.S. economic growth. Here are a few stories from the weekend that provide some of the geopolitical back story about why oil and gas prices are climbing. 

Perhaps the big story over the weekend was Iran’s announcement on Sunday that it will suspend oil shipments to Britain and France in response to their embargo against Iranian oil, which – along with the rest of the European Union (EU) – is set to take effect in July. The announcement was seen as more symbolic than significant, given that Britain and France are not nearly as dependent on Iranian oil as other European countries are. According to The Huffington Post, “Analysts said Iran's announcement would likely have minimal impact on supplies, because only about 3 percent of France's oil consumption is from Iranian sources, while Britain had not imported oil from the Islamic republic in six months.”

It is unclear to what extent Iran would continue to restrict exports to Europe in advance of the July embargo, when existing contracts with the EU are set to expire. The New York Times reported that, “Iran may also be reluctant, when its economy has been damaged by existing sanctions, to deprive itself of revenues from its larger European customers.” What is more, Reuters announced on Monday that China’s Unipec – one of two major buyers of Iranian oil – is expected to purchase less oil from Iran in 2012; how much less oil is not clear from the initial report. That announcement could have an impact on Iran’s strategic calculus.

The announcement from Tehran on Sunday contributed to higher oil prices on Monday, pushing the cost of a barrel of oil to a nine-month high. On Monday, The Huffington Post reported that, “By early afternoon in Europe, benchmark March crude was up $1.91 to $105.15 per barrel in electronic trading on the New York Mercantile Exchange. Earlier in the day, it rose to $105.21, the highest since May. The contract rose 93 cents to settle at $103.24 per barrel in New York on Friday.”

Funding requests for energy and energy-related programs are prominent in President Obama’s Fiscal Year (FY) 2013 budget. Here’s a quick breakdown of the requests that jumped out to me:

The National Science Foundation’s (NSF) budget request includes funding for clean energy programs that are intended to foster American competitiveness, which has been a focus of the administration in recent years. According to the budget overview, the administration is requesting an additional $14 million for research into future clean energy technologies, including solar power and energy efficiency technologies, bringing the total funding for that research effort to $355 million. What is notable is the NSF’s research approach would be interdisciplinary by nature, breaking down stovepipes between energy, climate and economic research communities to provide “an integrated approach to increasing U.S. energy independence, enhancing environmental stewardship, reducing energy and carbon intensity, and generating sustainable economic growth.”

The Department of Defense (DOD) budget request naturally includes funding for energy conservation and renewable energy programs given that the department is the single largest consumer of energy in the federal government. According to the DOD overview, the budget includes about $1 billion in requests for energy conservation programs (up from $400 million in 2010). This request includes $32 million for the Installation Energy Test Bed Program, which demonstrates how well new energy technologies would integrate into DOD’s infrastructure of 300,000 buildings. Meanwhile, funding for Operational Energy Capability Improvements would increase from about $20 million in FY 2012 to just over $26 million in FY 2013. (DOD just announced this year’s recipients of Operational Energy Capabilities Improvement funding.)

Yesterday President Obama delivered his Fiscal Year (FY) 2013 budget request to Congress. We’ll spend the next few days digging through the relevant agencies to highlight some of the requests related to programs that touch on our natural security work.

I thought we’d kick off the week by looking at cyber security, given that it is an issue that touches on our energy work, specifically with respect to smart and micro grid technologies. We have been quiet on the cyber security front in recent months, but our interest has not abated. Nor has the Obama administration’s, which will continue pushing cyber security spending in the president’s FY 2013 budget.

Let’s begin with the Department of Defense (DOD). Like last year, DOD announced that one of its strategic goals is to reduce its vulnerability with respect to the electric grid. According to the DOD overview, the department strives to “Protect critical DoD infrastructure and partner with other critical infrastructure owners in government and the private sector to increase mission assurance.” To accomplish this, the department has set a priority goal that “By September 30, 2013, the DoD will attain a passing score on a comprehensive cybersecurity inspection that assesses compliance with technical, operational, and physical security standards, on an overwhelming majority of inspected military cyberspace organizations resulting in improved hardening and cyber defense.” Meeting this goal would presumably reduce DOD’s vulnerability to the electric grid, which has been a particular concern for defense experts in recent years.

DOD’s budget includes a ton of funding for cyber security broadly, which may include electric grid-related activities. The White House Office of Science and Technology Policy provides an overview with a little more nuance about how that DOD funding may break down with respect to cyber security and energy efficiency programs, like smart and micro grid technologies: “The 2013 Budget sustains DOD’s basic research (“6.1”) with a record commitment of $2.1 billion for research in high-priority areas such as cybersecurity, robotics, advanced learning, information access, cleaner and more efficient energy, and biodefense.”

Earlier this week, NASA announced the findings of a University of Colorado-Boulder study that used data from NASA’s Gravity Recovery and Climate Experiment (GRACE) satellite to measure the ice loss of Earth’s land ice (glaciers and ice caps) between 2003 and 2010. According to a NASA news release, “One unexpected study result from GRACE was the estimated ice loss from high Asian mountain ranges like the Himalaya, the Pamir and the Tien Shan was only about 4 billion tons of ice annually.” The report added that “Some previous ground-based estimates of ice loss in these high Asian mountains have ranged up to 50 billion tons annually.” The results from the study point to the importance of Earth monitoring satellite systems for understanding environmental and climate change, particularly for national security planners trying to determine the pace of change and its sociopolitical and security implications.

Learn more about our work on Earth monitoring systems and national security planning here.

Photo: Rendering of measurements taken from NASA’s GRACE satellite system (excluding Greenland and Antarctica). Blue indicates ice mass loss, while red indicates a gain. Courtesy of NASA/JPL-Caltech/University of Colorado. 

For those of you who have not been following the national security or defense journals recently, the U.S. Naval Institute’s Proceedings published in its February 2012 edition a great article by U.S. Coast Guard (USCG) Commandant Admiral Robert J. Papp Jr. on the Arctic, paving the way – I hope – for a national level discussion on U.S. interests and goals in the High North.

“The Arctic region—the Barents, Beaufort, and Chukchi seas and the Arctic Ocean—is the emerging maritime frontier, vital to our national interests, economy and security,” Admiral Papp writes. “The difference [between the Arctic and the Atlantic and Pacific Oceans] is that in the rest of the maritime domain, we have an established presence of shore-based forces, small boats, cutters, and aircraft supported by permanent infrastructure and significant operating experience. Although the Coast Guard has operated in southern Alaska, the Gulf of Alaska, and Bering Sea for much of our history, in the higher latitudes we have little infrastructure and limited operating experience, other than icebreaking.”

Admiral Papp describes the U.S. Coast Guard’s responsibilities in the Arctic and, by doing so, lays out how the Coast Guard should be prepared to lead. “Our first challenge is simply to better understand the Arctic operating environment and its risks, including knowing which Coast Guard capabilities and operations will be needed to meet our mission requirements,” Admiral Papp states. This includes addressing the lack of USCG infrastructure that can support shore-based operations, as well as “ensuring that Coast Guard men and women have the policy, doctrine, and training to operate safely and effectively in the northern Arctic region.” In addition, the Coast Guard is “working closely with other key federal partners to lead the interagency effort in the Arctic,” leveraging its experience with “speaking the interagency language” and success with engaging the range of public and private stakeholders active in the Arctic, from local tribes to corporate adventurers.

There are several trends that are worth watching as they develop because they could affect the price of oil. 

Friday’s U.S. jobs report contributed to higher oil prices, in part due to predictions that demand for energy will continue to rise as the U.S. economy recovers. “U.S. benchmark crude increased by $1.48 on Friday to end the week at $97.84 per barrel,” CBS News reported. “It was the first time since Jan. 26 that the price of crude ended the day higher. Brent, used to price international varieties of crude, rose by $2.51 to finish at $114.58 per barrel.” The report added:

Prices rose after the government reported that the U.S. economy added 243,000 jobs in January. That was the biggest increase since April of last year, when 251,000 jobs were created. The unemployment rate fell to 8.3 percent — the lowest in three years. The positive U.S. jobs data added to evidence that the world's largest economy — and biggest user of gasoline — is growing stronger. 

Elsewhere in Nigeria, militants with the Movement for the Emancipation of the Niger Delta claimed responsibility for an attack against an Eni SpA oil pipeline. “A Rome-based spokesman for Eni, speaking on condition of anonymity per company policy, acknowledged that either a fire or attack had happened on the pipeline, cutting about 4,000 barrels of crude oil production a day,” The Wall Street Journal reported on Sunday. Nigeria, it is worth noting, is America’s fifth largest oil supplier.

• The New York Times reports that severe winter weather could stymie a protest movement in Russia.
• A Malaysia, rare earths metal refinery is close to obtaining permission to operate, which could upend China’s dominance of the market, according to The New York Times.
• Ukraine says that increased domestic consumption of natural gas in Russia is responsible for decline in shipments, The Washington Post reports.
• The Wall Street Journal reports that two of the world’s most powerful raw-materials companies are discussing a merger that could form an $80 billion mining giant.
• United Press International reports that yellow cedars – indigenous to Alaska and British Columbia – have been dying off due to climate change.  

Last Friday I pointed out that the U.S. Coast Guard Healy helped the Russian tanker Renda deliver 1.3 million gallons of fuel to Nome, Alaska.

It may sound like a normal mission for the Coast Guard, but I’m assured there’s nothing normal about traveling through the ice-covered Arctic in the middle of winter. I think there is a tendency to forget that icebreakers perform a crucial mission in the Arctic, during relatively ice-free summers or in the dead of winter. In this particular instance, the Coast Guard was helping assure delivery of fuel to the Alaskan town. According to a U.S. Coast Guard news release, “The [fuel] delivery was necessary due to an early winter storm that prevented a scheduled fuel resupply to the city [Nome].”

In a meeting I had last week, an official painted a vivid picture for me about the importance of an icebreaker and what this niche capability actually gives the United States. The USCG Healy began escorting the Renda out of Nome on January 20, 2012 for the nearly 400 mile journey across the frozen Bering Sea. According to this official, as the Healy was breaking through the ice, the Bering Sea continued to freeze over, extending its frozen reach. I thought this was an interesting point and one that certainty points to the importance of icebreakers in helping commercial vessels plow through the ice, if for nothing else but to avoid a Sisyphusian-like situation that traps commercial vessels in an endless sea of ice.  On Monday, after 10 days of icebreaking, both the Healy and Renda reached ice-free waters and have parted ways. The Healy has returned to its homeport, Seattle.

Icebreakers perform a critical function. U.S. policymakers need to have an honest conversation about what the U.S. mission needs to be in the Arctic and then decide what resources it needs to support that mission. Having an understanding about the role U.S. icebreakers perform in the Arctic should help get the conversation going.

Photo: The Healy breaks through ice on its journey to Nome, Alaska. Courtesy of the U.S. Coast Guard.