Donald Trump has said the U.S. should have taken Iraq's oil as war reparations for years. After all, war reparations have been paid following the end of World Wars I and II, as well as other conflicts. More recently, Iraq paid reparations for its invasion of Kuwait.
But Mr. Trump has also said that the U.S. should not have gone in and toppled Saddam Hussein's dictatorship in the first place. Senator Sanders is on record of voting against the war, and Secretary Clinton has admitted that her vote was a mistake.
There were no weapons of mass destruction found to justify the invasion. Mr. Trump has not explained how war reparations would therefore be justified.
"We should have taken it and we would've had it. Now we have to destroy the oil….Now I would say knock the hell out of the oil and do it because it's a primary source of money for ISIS," he told The New York Times in an interview over the weekend.
Mr. Trump was questioned about his plans to defeat ISIS, and then asked specifically, "Would you be willing to stop buying oil from the Saudis if they're unwilling to go in and help?"
"Oh yeah, sure. I would do that," Trump replied.
Trump's comment could not be further from the Republican establishment view. As candidate Jeb Bush said, the next president must "restore trust" and "work more closely" with America's "important partner" in Riyadh.
Mr. Trump's threat to cut off oil purchases from the Saudis was part of a broader complaint about the United States' Arab allies, which many in the Obama administration share: that they often look to the United States to police the Middle East, without putting their own troops at risk. "We defend everybody," Trump said. "When in doubt, come to the United States. We'll defend you. In some cases, free of charge."
Trump went on to say:
We are not being reimbursed for our protection of many of the countries that you'll be talking about, including Saudi Arabia. You know, Saudi Arabia, for a period of time, now the oil has gone down, but still the numbers are phenomenal, and the amount of money they have is phenomenal…And yet, without us, Saudi Arabia wouldn't exist for very long. It would be, you know, a catastrophic failure without our protection. I think if Saudi Arabia was without the cloak of American protection of our country's, of U.S. protection, think of Saudi Arabia. I don't think it would be around. It would be, whether it was internal or external, it wouldn't be around for very long. And they're a money machine, they're a monetary machine, and yet they don't reimburse us the way we should be reimbursed. So that's a real problem. "
Trump's latest talk is consistent with his overall theme that the U.S. is taken advantage of by other countries in trade agreements. And that as the author of the Art of the Deal, he would negotiate better deals as president.
But his comment about Saudi Arabia also reflects changes in oil market fundamentals. "The reason we're in the Middle East is for oil, and all of a sudden we're finding out that there's less reason to be there now."
"You know, we needed, we needed oil desperately years ago. Today, because - again, because of the new technologies, and because of places that we never thought had oil, and they do have oil, and there's a glut on the market, there's a tremendous glut on the market," he said.
Banning oil purchases from Saudi Arabia is not a good idea. It would not accomplish much, if anything.
1979 Iranian Oil Ban
As a result of the hostage crisis in 1979, the U.S. government froze Iranian government assets in the United States and U.S. banks overseas, totaling $12 billion, according to the U.S. Treasury. That freeze was eventually expanded to a full trade embargo until an accord was signed with Iran after the 1981 hostage release.
But a ban by one country in the world is easily worked around. For example, oil trader, Marc Rich, admitted that he had purchased oil from Iran even after the Islamic revolution during the reign of Khomeini, as well as during the U.S. hostage crisis in 1979, and until the mid-1990s. He claimed that a large percentage of the Iranian oil went to Israel during those years.
1973 Arab Oil Embargo
Another perfect example of the lack of control using an embargo, that was not widely supported as were the most recent Iranian sanctions, was the 1973-74 Arab oil embargo. Saudi Arabia and other members of OPEC stopped shipping oil to the U.S. and other allies in response to their involvement in the Yom Kippur war. These OPEC countries also reduced their output, disrupting world oil supplies.
The resulting oil shortage caused prices to spike by a factor of four. However, OPEC was not capable of punishing its target countries as intended. The oil majors (the "Seven Sisters") simply reallocated supplies from various sources, thereby equalizing the 15% shortfall among importing countries. (This was the finding of Harvard Business School Professor Robert Stobaugh. He handed me the unpublished study at the time.)
Imports from Saudi Arabia
The U.S. imported about 1.05 million barrels per day in 2015 from Saudi Arabia. That figure represents about 15% of net U.S. crude oil imports.
Saudi Aramco supplies crude oil to U.S. refineries owned by its joint venture, Motiva. If the U.S. were to ban Saudi crude imports, they could do an "exchange" of crude oil with other producers. Another producer(s) would supply its U.S. oil refineries and it would supply crude to meet the needs of its exchange partner(s).
There would be no significant impact on world markets. The ban would not hurt Saudi Arabia as Trump intends. What would get the Saudis' attention is any reduction in U.S. protection.
If Donald Trump is elected president, it will probably not be business-as-usual in the Middle East. Saudi Arabia and the Gulf States will need to compensate the U.S. for its protection and fight ISIS or take its risks.
It is difficult to assess what the impact would be on oil prices. If Saudi Arabia compensates the U.S. and helps defeat ISIS, it could have a calming effect, especially if Trump develops more respect for the U.S. from Russia.
If the U.S. were to reduce its role in the region, the oil price risk premium could rise significantly.
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