This transcript is from a CSIS podcast published on January 22, 2025. Listen to the podcast here.
Quill Robinson: Welcome to Energy 360: The Transition, a CSIS miniseries exploring the energy implications of the 2024 election. I'm your host, Quill Robinson.
Oil is a powerful economic and geopolitical tool. The Trump administration is keen to maximize U.S. production while limiting strategic adversaries’ ability to use their own oil resources. This week, Joseph and I discussed the geopolitics of oil and the power of oil sanctions with Clay Seigle. Clay is the Energy Security and Climate Change program's new Senior Fellow. He also holds CSIS's James R. Schlesinger Chair for Energy and Geopolitics. With over two decades working in market intelligence and political risk, Clay is a veteran energy industry analyst. Let's dive in.
President Trump ran on restoring American energy dominance. He won on restoring American energy dominance, and he is now pledged to “drill baby drill” to unleash American oil and gas. Today we're going to dive a bit deeper into oil and a couple of different topics related to this. We're very lucky to have Clay Seigle, our new Senior Fellow and Schlesinger chair with the Energy Security and Climate Change program. He has more than two decades of experience doing geopolitical and market analysis on this topic of oil, so a very timely hire for our program and very timely for this topic that we're going to be tackling today. So Clay, welcome. Good to have you here.
Clay Seigle: Well, it's a pleasure to be here with y'all. Looking forward to diving in and discussing all the issues of the day.
Joseph Majkut: Clay, since you are new to the audience, maybe it would be good to just share with them a little bit about who you are and what you've done in the past, and then we can dive into some of the more subject matter that we're going to approach over the next few years.
Clay Seigle: Okay, great. Again, like I said, it's a pleasure to be here at the Center and looking primarily after energy security with a focus on the traditional fuels, oil and natural gas, that are going to be such an important contributor to the supply mix and the issue of energy security going forward. My career has been a really interesting one in which I've been able to basically advise corporate leaders, investors and traders, and some policy makers on energy security. My career has spanned a few different opportunities in oil market intelligence, and so keeping track of physical supply and demand, as well as what's going on in the financial trading world to help oil and gas traders just trade smarter – to understand when to buy low, when to sell high – and how to think about fundamental factors that influence pricing dynamics. And I've also had the opportunity to help out with some management roles in my career at organizations and companies that provide that market intelligence and strategic insight to decision makers. And so to be able to be here at the Center at this time, as a new group of policymakers get started in Washington DC and working with their counterparts around the world to think about energy security and how to provide what's needed to businesses and consumers, it's a fantastic time to be here with y'all.
Joseph Majkut: We are really excited that you came to join us here at CSIS, Clay. Your expertise is so obvious and I really look forward to our audience being able to benefit from it – not just the podcast listeners, but everybody who's in the CSIS network. Particularly because this administration, we started the week with an inauguration, and liquid gold, getting it out of the ground and using it for our own economic development and for our own geopolitical strength, is going to be the order of the day. And so we very much look forward to seeing your expertise brought to bear on both the policy opportunities and the policy challenges that arise over the next few years.
Quill Robinson: Clay, I just want to ask, it's week 1.0 of Trump 2.0 that we're in right now. As somebody who's worked in the oil and gas sector and followed it very closely for a couple of decades now, what are the numbers and events that we should be paying attention to right now when it comes to oil and gas that sort of tee up this administration and their “drill, baby, drill” agenda?
Clay Seigle: Well, this of course is the critical inflection point between campaign and election season and governing time. This happens every four years, maybe even two years. And so, what I think industry is looking for as it makes its big decisions on capital spending and pursuing resource development and marketing of those resources, is that kind of separation from the previous stage of kind of slogans and talking points and moving under real policy decisions. Some of it, during the campaign season, was characterized by slogans like “drill, baby drill.” At the same time, we know from the U.S. oil patch and from the industry that supply is already really growing in a material way, and so the United States leads the world in export volumes of both crude oil and natural gas, and so we're already kind of in pole position there. So, what does it mean, what can it mean to the oil and gas industry to pursue at least kind of the vision of “drill, baby, drill” compared to what we already have as a baseline?
And so one of the first things that the industry is looking for is relaxation of regulations and permitting decisions that enable them to have the best shot at developing American resources. And so in places like Alaska, in places like the outer continental shelf offshore, and in federal lands onshore, the industry wants to know how much easier potentially could it be to develop resources in those regions. Then the second thing is kind of a market-based approach to supply development in the United States, which is that in this phase of tight oil and shale gas exploitation, the capital markets are really the determinant of the supply path and the supply trajectory. And the oil patch has been down road before and seen this movie before with price volatility, including relatively high price time periods. And it doesn't want to make the same mistake, and, to the point, its investors don't want to see the industry make the same mistake that it has before in oversupplying the market and ultimately undermining its own interest. We have to transition from kind of a slogan of “drill, baby drill” to really understand what it can mean in terms of oil and gas company's ability to provide supplies at profitable and economically viable prices. That's the first thing that we need to look for in this environment.
Joseph Majkut: You know, one thing I would love to hear your thoughts on Clay is for a long time, policymakers were pursuing energy independence, the idea that the U.S. could produce enough energy to meet its own needs. And thanks to the Shell Revolution, at least on a volumetric basis, we've arrived there. But now the notion is energy dominance. One of the things that I think is most important in understanding that as a concept is that energy markets are global markets. And so, how much in your view does a smart approach and a clear understanding of global market conditions and trends influence thinking here in the United States when we're trying to formulate what you would call an energy dominance agenda?
Clay Seigle: Well, when it comes to energy dominance, one of the first prerequisites is just awareness of those global and regional supply and demand fundamentals. If you take a really interesting market like the United States – it's really multiple oil markets in a way because you've got the East Coast of the United States, which doesn't have a huge concentration of oil refining capacity and is largely dependent on imports of refined products, like gasoline and like diesel, first of all from overseas. And a lot of the gasoline in the East Coast is supplied by Europe and some other trading partners, even India when the economics are right. But then also another region of the United States, which is the U.S. Gulf Coast where I am here in Houston. And so this is the largest concentration of sophisticated refining capacity in the United States, and we ship a lot of the refined products that we make down here up to the East Coast to meet regional demand in the East Coast.
And so understanding those realities of supply and demand, I started with the refined product side, but you can also make an example on the crude oil side. And so in that case, think about the composition of these refineries in the Gulf Coast. They are what we call “heavy upgrading capacity” that were designed, really, decades ago to monetize the price differential between relatively lower priced heavy crudes and higher-sulfur crudes originally from the Middle East, later from sources in the Americas, like Latin America and Canada – which I'm sure will come up in our discussion – to produce again those higher value refined products like gasoline, diesel, jet fuel. So the United States is long the other kind of crude oil, which is light, low-sulfur, or sweet crude oil that we're producing prolifically in the shale plays, foremost among which is the Permian Basin, but there are other important producing basins in the United States as well. And so, to use the trading parlance, we're long light, sweet crude oil, but we're structurally short, heavy, higher-sulfur crude that those sophisticated refineries, primarily in the Gulf Coast, need in order to produce that slate of refined products economically and according to plan.
So there's only so much of the homegrown light sweet crude oil that those refineries can use. We still need heavy, higher-sulfur crude from overseas or, let's say, abroad in order to provide the mix, the recipe that those refineries need to do their job. And so dominance in the United States should probably include a healthy dose of international cooperation and solid trade agreements in order to get the United States oil industry what it needs in order to succeed for consumers and businesses here.
Quill Robinson: So Clay, you touched on the domestic dynamics of energy dominance and then went a bit into that idea of the international components of energy dominance, as well. So, cooperation. Is it possible that this also provides leverage geopolitically? And then what sort of tools could the Trump administration use in terms of energy dominance and leverage?
Clay Seigle: Yeah, it certainly could include leverage. And the intersection of energy security and national security is a longstanding one. We've been working on kind of the intersection of the two for many decades in the United States and overseas. And that kind of colors our thinking when it comes to the energy challenges of the day. And so because, first of all, the United States has already become the largest exporter of both crude oil and natural gas, it does have a very important seat at the table when it comes to first of all, the hot wars that have been taking place in both Europe and the Middle East in recent months, and also in potential hotspots – for example, in the Pacific – that could arise in the future. So it gives us a seat at the table, and other trading partners around the world are really focused on the extent to which the United States will continue to be seen as a staple, reliable supplier of energy to so many buyers around the world. And the extent to which the United States still wants to play that role and how it intersects with the new prerogative of energy dominance is one of the most important questions that I think international audiences will be asking as the new group returns to the table.
Quill Robinson: So Clay, on January 10th, the Biden administration announced new sanctions on Russian oil. Could you tell us a little bit about that and what those actions involved, but also how oil sanctions could play a role in bringing that conflict to a close? As senator now Secretary of State, Marco Rubio and President Trump have said that they would like to do.
Clay Seigle: The new set of sanctions from January 10th – it definitely has teeth. Practically speaking, there's basically two sets of sanctions that are involved. One is on ships and the other one is on people and companies, particularly two Russian producing companies that we can dive in and talk about. But the sanctions on the so-called “shadow tanker fleet” that have been delivering Russian oil when it comes to crude oil to China and India. It's almost like secondary sanctions because that shadow tanker fleet is basically now off limits. In fact, Shandong Province in China, where some of the major importing port facilities are located for Chinese crude imports, kind of preemptively told all of the operators there to stay away from the recently sanctioned ships. That move against the shadow tanker fleet is going to push more Russian exports into the sanctions compliance fleet. Those are the ships that are backed by G7 approved insurance and related services, and that is going to have the effect of capping the sale price of that Russian crude oil at $60 a barrel. That's going to force Moscow to accept a steep discount and cut Kremlin oil revenues. So I think that that one really does have teeth.
Then the second one I mentioned is we now have blocking sanctions on two of the Russian oil producing companies, Gazpromneft and Surgutneftegas. And those are also significant. Gazpromneft has been a big money maker for parent company, Gazprom, during the past year plus of really low natural gas prices. They've only recently rebounded with the cold winter. So, I think that they're going to miss those revenues, at least initially. Surgut has unique problems of its own. It's got a refinery, the Kirishi refinery, near the Baltic Sea that is totally geared to the export market. It's got very limited ability to redirect its offtake into the domestic Russian market, and so now that it's blacklisted, it runs the risk of shutdown unless access to the international market is restored. And I think that that brings us to part two of what to expect from this, which is that bad actors are going to use their trade craft to get around the new sanctions eventually. And they've got quite a few tools in their toolkit: everything from sham Russian corporations that are going to use fake certificates of origin, to kind of reshuffling cargoes from one ship to another on the high seas, all the way to actually discharging a cargo to an onshore storage tank and then reloading it onto a ship that has no idea what's happened before that. All this stuff is going to be used in what I call “oil laundering” to just kind of obfuscate and obscure the origin of those Russian cargoes to get it back into the market.
It's going to take a while for those mechanisms to get stood up, so I think that in this first stage, Moscow is going to have a vulnerability; they're going to have a challenge with lower export volumes and lower revenues. That's where the new administration, if it wants, can basically double down and announce that it has every intention of continuing this path that the outgoing administration set in its final days. And then in subsequent rounds, I think you're going to see sort of a cat and mouse game between Treasury, on one hand, and these bad actors, on the other hand, that are sort of in a competition to outdo the other. And just as soon as a new crop of shell companies in Moscow crops up to buy these cargoes from the blacklisted companies, and as soon as more new shadow tankers enter the shadow tanker fleet, the Office of Foreign Asset Control within Treasury is going to have to crack down. They're going to, first of all, have to stay vigilant. They're going to have to identify the new entities and ships that are cropping up into the trade, and they're going to have to, like a continuous game of whack-a-mole, get them onto the SDN list and make sure that they are not able to continue the trade.
Joseph Majkut: You know, one of the things, Clay, that I just want to kind of dial back a little bit... It does seem to me over the last decade, decade and a half, U.S. policymakers – they've been much more willing to shift the way that oil markets work by applying sanctions and putting pressure on producers whose otherwise political behavior they want to change. How much is that a technique that's enabled by the U.S. having a large degree of production? And if the Administration is able to change the permitting rules, change environmental compliance such that U.S. industry continues to grow, does that tool get stronger or are all of the evasive techniques that you're describing just creating a sort of bifurcated market that it's going to be harder for us to have a grasp on over time? I recognize that's a large question, but I'd love your thoughts on where we are today.
Clay Seigle: Well, a preliminary thought is that the bigger a player the United States is in the world energy market, the greater the leverage it's going to have on these issues and questions of energy security. And so, to be certain, going back to your question, the significant ramp up in United States production of oil and gas is a really important ingredient in the leverage recipe. But it's not the only one. And so, another kind of potential bottleneck in our role to play on the world energy stage is our ability to export. United States crude export capacity, which of course was substantially zero 10 years ago before the export ban on everything except Alaskan oil was lifted, is now up to substantially 4 million barrels a day. The projects that have enabled that export capacity to surge are naturally in the coastal regions, primarily the U.S. Gulf Coast, some on other coasts, but primarily the U.S. Gulf Coast.
And so there's a pipeline of projects in development that depend on midstream projects coming to fruition, to take that oil from the producing regions to ports and facilities at those ports, to enable exports to increase. But of course, investors and companies don't want to overbuild capacity, and that's again, like, the perennial lesson that the oil market has had to face over the decades. If you overbuild capacity, honestly in any industry, that has negative economic repercussions. So they want to avoid that and they want to produce that export capacity and develop it at the right pace. My point here is that if oil and gas export capacity continue to increase along with production, we will have an even bigger seat at the table because the United States supply that's put into the global market and is being sought by buyers around the world is in competition with other producing countries. Many of those countries are allies of the United States. Others are adverse to United States interests and challenge us in the issues around the world in foreign policy and in economic policy. And so we want to have as large a seed at the table as possible. It depends, first of all on production volumes, but also on marketing capacity, which is really export capacity.
Just a great, maybe, anecdote to close on is the issue of liquified natural gas exports from the United States and the build out of our export capacity. As many of our listeners will know, the permitting approval for new gas exporting facilities was paused by the outgoing administration. A review did take place and was issued, and I believe that some of the conclusions of that study would require a little bit of time for the new administration to act on and to really enable those projects to move forward in a way that the investors and corporate managers have confidence. And so we do believe that that's coming, but there has been a pause that's had an impact on the way buyers of United States energy commodities see the United States. I think that the outcome of all this review is going to be that the United States is back on track to fully develop its LNG export capabilities. And so buyers can count on the United States as a reliable supplier in decades to come.
Quill Robinson: So Clay, obviously Venezuelan and Iran are two other important players in global oil markets, and the Trump administration has a maximum pressure agenda when it comes to these countries. Can you just close by telling us – how much room is there to use oil sanctions as a tool to carry out this geopolitical agenda?
Clay Seigle: Yeah, I believe that it's substantial. Let's start with Iran. Iran's had oil sanctions imposed on it for decades in the last century and this one, but the big inflection point was the 2018 U.S. withdrawal from the Iran Nuclear Treaty and the reposition of oil sanctions that prevailed before. That agreement was signed in 2015. So before that round, just to give it some numbers, Iran's crude exports were well over 2 million barrels a day. By 2019, under the so-called “Policy of Maximum Pressure”, they were cut to just 330,000 barrels per day. Now, what happened in the intervening period? Biden relaxed sanctions enforcement in a material way. That essentially allowed Iran to export as much as it wanted or could to China. And that policy has increased Iran's crude exports back above 1 million barrels per day, maybe 1.2 during the past year.
But Chinese buyers who are concerned about trouble with Washington were already anticipating the return of Maximum Pressure with Trump. They've already started pulling back from purchases of Iranian oil right after the November election took place. And Trump, of course knows that Tehran is reeling from this series of military and security setbacks in its confrontation with Israel. Right? Hamas, Hezbollah largely decimated. We've seen now direct Israeli attacks on Iran itself, and to top it all off, Iran has a really serious domestic energy crisis. They've got widespread power shortages. And so maximum pressure sanctions that could take crude exports materially lower, again – let's say 500,000 barrels per day – would really add to the pain. And it could pressure Tehran to be more accommodating on the world stage, similar to the situation we have with Russia. If you have a real reduction of Iranian oil exports, it's going to make it easier for OPEC+ to implement its long-postponed plans to gradually increase output starting in April, continuing through late next year. That's another thing that we need to be mindful of, is how it affects the broader coalition of oil producing countries. Even though the United States is certainly not part of OPEC+, it is selling its oil to a lot of the same buyers, and so that's part of the dynamic.
You know, when it comes to Venezuela, hawks like Rubio and Waltz are probably going to be inclined to crack down on cooperation that's been taking place between Caracas and Tehran. That's both in the military sphere and in these oil swaps that we've seen that have helped both of those countries cushion the blow of sanctions. I think the first signal to watch on Venezuela is whether Indian refiners stick with them. They came back into the trade when a General License 44 was approved and then they pulled back when it expired, or when its expiration was kind of approaching last Spring. More recently, one of the biggest Indian oil companies, Reliance, reportedly got permission from Washington last month to do business with Caracas again, and I think the ship tracking platforms have substantiated. Cargoes are changing hands between those nations. If Indian buyers withdraw again from trading with PDVSA, much as they're having to do with Russia's sanctioned oil companies, then we'll have a good indication that that risk is substantial and needs to be taken into account.
Quill Robinson: Clay, thank you so much for joining The Transition.
Joseph Majkut: Yeah, and thank you for being aboard at CSIS. We look forward to all the good work to come.
Clay Seigle: My pleasure. Thanks guys.
Quill Robinson: Thanks so much for joining us on The Transition. We'll see you next episode.
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