Last week President Trump said that the high price of oil is “a very small price to pay" for keeping nukes out of Iran. His Secretary of State, Marco Rubio, added that if Iran got a nuclear weapon, it would have more leverage to keep the Hormuz Strait closed and “make our gas prices like $9 a gallon.”
Trump and Rubio mistake the economics of oil and realistically all market goods, which means they’re mistaking who has leverage. It’s not Iran.
Starting with Rubio, Iran can’t “make our gas prices like $9 a gallon” simply because the previous number implies that Iran will cease selling the abundance of oil it controls. No chance.
No regime shuts off its primary – by far - source of revenue. No matter what happens, the oil is going to flow.
Which brings us to 1973. To this day, a persistently false myth lives that says OPEC members deprived the U.S. of their oil with the “embargo.” No such thing occurred. In fact, Iran didn’t even participate in the embargo that solely involved Arab members of OPEC. Iran is not an Arab country.
Still, Americans still consumed “Arab” oil in 1973 since embargos are wholly symbolic. While Arab nations ceased selling directly to U.S. interests, they did NOT give up the massive U.S. market. Translated, Arab members of OPEC sold their oil to non-American buyers who turned around and sold it into the U.S. No one ever, ever kisses off the U.S. market.
Remember this as those who should know better claim American “energy independence” somehow helps us avoid the pain of “dependence.” Rich Lowry has made this claim. He could be convinced otherwise. Not only is the oil price a global concept, it’s endlessly true that short of oil producers cutting off sales, oil will reach all buyers. Put another way, the Swiss are still consuming oil at the global price despite a lack of oil deposits within Switzerland.
Which brings us to Trump. He claims expensive oil is the price we must pay to stop Iran. That’s just not true. It's evidence of short memories. Lowry would understand since he was correctly a fan of Ronald Reagan.
What’s easily forgotten about Reagan’s presidency, and the presidency of Bill Clinton that was seen by many Democrats as Reagan’s third term, is that oil was very cheap under both. And no, that’s certainly because there was lots of oil extraction in the U.S. Quite the opposite. Instead, oil was cheap without regard to what OPEC, Iran, Saudi, Russia, Nigeria, Venezuela, or anyone else did precisely because the dollar in which oil is priced was strong. It’s that simple.
Sadly, it seems, no one close to Trump (even oddly enough Larry Kudlow) is conveying the basic truth to Trump and Rubio that with a strong, stable dollar, oil would be cheap and Iran would have no leverage.
Of course, unknown is if Trump, Rubio, Lowry, and countless more conservatives oddly impressed with energy autarky will accept the alleged tradeoff that would come with Iran having greatly reduced energy-price leverage: the end of U.S. “energy independence” and other economically bankrupt notions like “energy dominance.” That’s because if the much preferrable scenario of dollar dominance prevails, oil will be too cheap to extract stateside.
But the U.S. will dominate the Middle East like never before. True leverage.
