POLITICO Nightly: The oil market’s nightmare scenario

 

BY SUDEEP REDDY Presented by Armed supporters of Yemen's Houthi rebels attend a rally in solidarity with the Palestinian Hamas movement's armed resistance against Israel in Yemen's capital Sanaa today. | Mohammed Huwais/AFP via Getty Images SUM OF ALL OIL FEARS — It sounds like a preposterous scenario discarded in a Hollywood writers’ room: A group of renegade militants from a small Middle East country obtain cartons of missiles from an American adversary, attack Western oil interests and cripple the global economy until their demands are met. It was a prospect easily dismissed as fanfiction for amateur oil traders — until now. The attack on a fuel tanker in the Red Sea on Friday brought to real life the immense economic risks of a ballooning crisis in the Middle East. The Houthi rebels in Yemen have been firing Iranian missiles at commercial ships for months, triggering turmoil that has already reshaped global shipping routes and put new inflation threats on the radar. U.S. military forces have fought back to prevent dozens of direct attacks on global cargo. But the latest attacks on oil interests marked a new realm of concern. Ever since the Middle East oil crises of the 1970s, which contributed to runaway inflation that reshaped the U.S. political landscape and energy policy, the remote prospect of a shutdown of a key passageway in the Middle East has represented the sum of all fears in the geopolitics of oil. It’s so unthinkable to fathom a loss of a fifth of the world’s oil in a typical supply-and-demand curve that analysts imagine a world of $380-per-barrel oil and $10 gasoline purely based on guesswork out of thin air. Today’s Middle East crisis is spiraling in ways far beyond Yemeni rebels firing cheap missiles. The weekend attack by Iranian proxies on the Jordan-Syria border killed three American soldiers and wounded dozens more; it marked the first U.S. troop deaths in combat in the region since the latest wave of turmoil in the Middle East began in October. (U.S. troops have been attacked 164 other times in Iraq and Syria in that period.) President Biden and his team spent the day huddled in the Situation Room to formulate a response — one that is surely intended to exact revenge on Iranian interests without ricocheting to hit American interests or global oil supplies. The good news for the overall economy is that these moments of fear tend to pass swiftly; Friday’s successful attack on the Red Sea tanker was contained quickly enough to be just a blip in markets. But what happens if the remote scenario plays out? What would the Biden administration do in a moment of surging oil prices that could derail a strong economic expansion nine months before an election? Watch three key fronts: Military deployment to protect energy interests: The U.S. has long proven itself willing to militarize the Middle East for strategic reasons — and knows how to do it without going alone. President George H.W. Bush organized a true global coalition for the first Gulf War. In recent months, the Biden team sought to assemble international military patrols and escorts for the global shipping industry with commercial vessels from more than 40 nations coming under attack. Some nations are reluctant to get involved too deeply; they’ll be less reticent in a deeper crisis. Even oil-importing nations that engage deeply with Iran — such as China and India — stand to lose if oil prices spike at a difficult economic moment. That’s why top Biden officials are pressuring the Chinese to help rein in Iran despite persistent U.S.-China tensions. Energy policy to cushion an oil shock: Oil remains the U.S. economy’s kryptonite. Nearly every U.S. recession since World War II was associated with spiking oil prices. (The Covid-19 oil crash marked a glaring exception.) Pain at the pump translates immediately into lower consumer sentiment, poorer approval ratings and panicky politicians. The U.S. still holds an emergency tool for any crisis: the Strategic Petroleum Reserve, a 700-million-barrel stockpile born out of the 1970s Arab oil embargo. President Trump once proposed slashing the SPR; years later he wanted to fill it up when oil prices tanked in the pandemic. Biden used the SPR to offset higher prices in 2022 to calm oil markets after Russia invaded Ukraine; the move helped save his party in the midterms. While depleted today to only half its capacity , you can expect that oil to flow in a moment of crisis this year. China has amassed even larger reserves; a barrel of oil anywhere provides a cushion to calm markets and relieve short-term disruptions. Energy politics in an election year: No product price looms larger in America’s public consciousness than the price of gasoline. It was among the top policy issues on voters’ minds in New Hampshire and Iowa this month, according to Google Trends. And it would surely be the No. 1 issue up for debate if oil prices spike on top of years of historic inflation. Yet the issue today is not as clear-cut as it would’ve been a few years ago. The U.S. is now the world’s largest oil producer, with output hitting record after record under Biden despite a broader policy agenda designed to transition the world away from fossil fuels. The other elements of Biden’s climate agenda — the spending to support electric vehicles and renewables — would also take on new meaning on the campaign trail if Americans are worried about how to escape yet another hopeless cycle of pain at the pump. None of these scenarios can ever be outlined with certainty — that’s why nobody ever wants to go down them. But if any play out, there’s no feel-good Hollywood ending. Just immense economic and political torture. Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com . Or contact tonight’s author at sreddy@politico.com on X (formerly known as Twitter) at @reddy .   A message from American Beverage: Not all plastic is the same. America’s beverage companies are carefully designing our plastic bottles to be 100% recyclable, including the caps. This means our bottles can be remade into new bottles, and that can reduce our use of new plastic. Learn more at EveryBottleBack.org.   WHAT'D I MISS? — Trump tax return leaker sentenced to five years in prison: A former IRS consultant was sentenced to five years in prison for leaking former President Donald Trump’s tax returns as well as the filings of thousands of other wealthy people to the news media. A district judge today agreed with the Justice Department that Charles Littlejohn, 38, deserved the maximum statutory sentence for what she called “egregious” crimes . Judge Ana Reyes, a Biden nominee to the bench, focused on Littlejohn’s decision to release Trump’s filings, which Reyes called “an attack on our constitutional democracy.” — Supreme Court sets date for high-stakes abortion pill oral arguments: The Supreme Court today set a date for one of the highest-stakes and closest-watched cases of the term — announcing it will hear oral arguments on how patients can access mifepristone , the commonly used abortion pill, on March 26. In December, the high court said it would hear the case brought by the conservative group Alliance for Hippocratic Medicine challenging policies expanding access to the drug mifepristone. Those policies, issued in recent years by the FDA, have allowed the pills to be prescribed online, mailed to patients and dispensed at brick-and-mortar pharmacies. — NATO chief huddles with Trump allies in longshot Ukraine funding push: NATO chief Jens Stoltenberg on Monday kicked off a critical trip to the U.S., where he’ll meet with Biden administration officials, lawmakers and allies of former President Donald Trump in a high-stakes bid to unlock $60 billion in funding for Ukraine. The longest-serving chief in the alliance’s history will deliver a speech at the Heritage Foundation on Wednesday, a conservative think tank that’s closely aligned with Trump. The visit comes as Trump and allies press Republicans to reject a $111 billion package that includes aid to Ukraine, Israel and Taiwan over a disagreement with the White House on border policy.   JOIN 1/31 FOR A TALK ON THE RACE TO SOLVE ALZHEIMER’S: Breakthrough drugs and treatments are giving new hope for slowing neurodegenerative diseases like Alzheimer’s disease and ALS. But if that progress slows, the societal and economic cost to the U.S. could be high. Join POLITICO, alongside lawmakers, official and experts, on Jan. 31 to discuss a path forward for better collaboration among health systems, industry and government. REGISTER HERE .     NIGHTLY ROAD TO 2024 PATCHING THINGS UP — The Biden campaign met with Rep. Rashida Tlaib last week as the president aims to patch up relations with key parts of the Democratic party , two people familiar tell POLITICO. Tlaib, the only Palestinian member of Congress, has been an outspoken critic of the Biden administration’s handling of the Israel-Gaza war. Their meeting comes as Biden’s campaign manager traveled to Michigan last weekend to meet with local officials seething over the Gaza war. PHILLIPS GOES TO COURT — Democratic presidential candidate Rep. Dean Phillips wants the Wisconsin Supreme Court to order that he be put on the primary ballot in the battleground state after he was excluded by the state’s top Democrats who only put President Joe Biden’s name on the ballot, reports the Associated Press. Phillips asked the state’s highest court to take his case on Friday. On Monday, the Wisconsin Supreme Court gave the committee that put forward Biden’s name as the only Democratic candidate, as well as the state elections commission, until Wednesday to respond. Former President Donald Trump and five of his challengers, including four who have ceased campaigning, will also be on the Wisconsin ballot.   A message from American Beverage:     AROUND THE WORLD U.S. Marines assigned to Fleet Anti-Terrorism Security Team Central Command (FASTCENT) and members of the Jordanian Armed Forces conduct weapons training during exercise Infinite Defender 23 in Jordan, Aug. 19, 2023. | Sgt. Angela Wilcox/U.S. Naval Forces Central Command DEADLY TRAILER — An enemy drone launched by Iranian proxies that ended up killing three U.S. soldiers was trailing a U.S. drone that was returning to the base in Jordan , allowing it to evade detection, according to a Defense Department official, reports POLITICO. The attackers saw an “opportunity” and “exploited” it, said the official, who was granted anonymity to discuss a developing security situation. The assault, which dramatically escalated the situation in the Middle East, has put renewed pressure on the Biden administration to respond more forcefully to the more than 160 attacks on U.S. troops in Iraq, Syria and now Jordan. In addition, an hour and a half after the strike on the small base, known as Tower 22, Iranian proxies launched another drone at a U.S. base just across the border in Syria, al-Tanf Garrison, said the DOD official and another U.S. official. A U.S. drone, Raytheon’s Coyote unmanned aerial system, shot it down, the DOD official added. The two facilities are just kilometers apart, and U.S. drones often defend both, the DOD official said. The news comes as the Pentagon is still gathering information about how a drone launched by Iranian proxies penetrated U.S. defenses and struck the living quarters at Tower 22, which also injured at least 34 more service members. TUNNEL VISION — An Islamic cemetery in the southern Gaza city of Khan Younis, has been obliterated, transformed by the Israeli military’s search for underground Hamas tunnels , The Associated Press reports. An Associated Press journalist saw a destroyed mosque and — where the cemetery had once been — a 140-meter-wide pit that gave way to what the army called a Hamas attack tunnel underneath. The military said today that combat engineers had demolished part of the network, releasing a video showing massive explosions in the area. As Israel moves forward with a ground and air campaign in Gaza that health officials in the besieged enclave say has claimed over 26,000 Palestinian lives, the military’s destruction of holy sites has drawn staunch criticism from Palestinians and rights groups, who say the offensive is also an assault on cultural heritage. Under international law, cemeteries and religious sites receive special protection — and destroying them could be considered a war crime. Israel says Hamas uses such sites as military cover, removing them of these protections. It says there is no way to accomplish its military goal of defeating Hamas without finding the tunnels, where they say the militants have built command and control centers, transported weapons and hidden some of the 130 hostages it is believed to be holding. They say digging up the tunnels involves unavoidable collateral damage to sacrosanct spaces.   YOUR GUIDE TO EMPIRE STATE POLITICS : From the newsroom that doesn’t sleep, POLITICO's New York Playbook is the ultimate guide for power players navigating the intricate landscape of Empire State politics. Stay ahead of the curve with the latest and most important stories from Albany, New York City and around the state, with in-depth, original reporting to stay ahead of policy trends and political developments. Subscribe now to keep up with the daily hustle and bustle of NY politics.      NIGHTLY NUMBER $81 billion The amount that American defense companies made in new foreign military sales in 2023, a more than 50 percent increase from 2022 , with huge deals spurred by Russia’s invasion of Ukraine leading the way. RADAR SWEEP IS ANYBODY OUT THERE? — A new NASA telescope is looking to answer the age-old question: does life outside of Earth exist? Since the James Webb Space Telescope launched two years ago, NASA has already had its eyes on its next big project which will launch into the galaxy looking for habitable planets outside of the solar system. Meet the next flagship space telescope, the Habitable Worlds Observatory, that could have the potential to find life on exoplanets , or planets orbiting a star that is not the sun. While it may not launch for a dozen years, NASA scientists are already saying this type of technology — that allows the telescope to see the planets without the star’s light overpowering it — could be a “pivotal moment for mankind.” Dan Falk writes for Smithsonian Magazine. PARTING IMAGE On this date in 2009: Illinois Democratic Gov. Rod Blagojevich is removed from office by a vote of 59-0 in the Illinois state Senate. Blagojevich was ultimately sentenced to 14 years in prison for his role in a corruption scandal that included an attempt to sell the Illinois U.S. Senate seat left vacant by President Barack Obama. | M. Spencer Green/AP Did someone forward this email to you?  Sign up here .   A message from American Beverage: Our plastic bottles are made to be remade. America’s leading beverage companies - The Coca-Cola Company, Keurig Dr Pepper and PepsiCo - are working together to reduce our industry’s plastic footprint through our Every Bottle Back initiative. We’re investing in efforts to get our bottles back so we can remake them into new bottles. Together, we’re:  • Designing 100% recyclable plastic bottles – we’re making our bottles from PET that’s strong, lightweight and easy to recycle.   • Investing in community recycling – we’re marshaling the equivalent of nearly a half-billion dollars with The Recycling Partnership and Closed Loop Partners to support community recycling programs where we can have the greatest impact. • Raising awareness – we’re adding on-pack reminders to encourage consumers to recycle our plastic bottles and caps.     Please help us get Every Bottle Back.     Follow us on Twitter Charlie Mahtesian @PoliticoCharlie Calder McHugh @calder_mchugh Mia McCarthy @Reporter_Mia   FOLLOW US

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