Friday cartoon

President Donald Trump was wrong last week when he said the United States doesn’t need Middle East oil. For one thing, U.S. refiners still need to process it to make the products their customers want. What’s more, America’s car drivers and truckers need it to keep flowing or else they’ll face higher prices at their local gas pump.

Trump made his assertion during an address from the White House after Iran launched a barrage of missiles at two airbases in Iraq used by the U.S. military and amid fears of an escalation in attacks on key oil infrastructure in the region, including potentially the flow of oil through the Strait of Hormuz — a narrow neck of water that connects the Persian Gulf to the open seas.

It’s certainly true that very little of the crude produced in the Persian Gulf region now finds its way to refineries in the United States. Less than 5% of the 16.5 million barrels a day of crude and condensate — a light form of oil pumped from gas fields — that flowed through Hormuz in 2019 went to American refineries, according to tanker tracking data compiled by Bloomberg.

By contrast, four Asian countries — China, India, Japan and South Korea — bought two-thirds of all the crude and condensate from the region. If you add in the rest of Asia, that figure rises to more than 80%. Little wonder then that Trump is calling on those countries to take a bigger role in protecting oil flows through the strait.

But shipments to the United States cannot be dismissed so easily. Individually, the country is the fifth biggest buyer of Middle Eastern crude. Of course its imports from the region have tumbled as domestic oil production soared with the shale booms. But the countries of the Persian Gulf still account for one in every eight barrels of crude imported into the United States.

Before the shale boom began, U.S. Gulf coast refiners invested millions of dollars revamping their plants to process relatively cheap heavy crude from the Middle East and Latin America into the low-sulfur products demanded by local consumers. Since 2012, they have rejigged their facilities again to process higher proportions of the type of light, sweet oil (containing little or no sulfur) that is extracted from shale formations.

Net exporter

Much was made of America’s oil independence when the country posted the first full month as a net exporter of crude and petroleum products since government records began in 1949. That became apparent at the end of November, when monthly data for September were published. The feat was repeated in October (the most recent month for which we have monthly figures).

But one shouldn’t lose sight of the fact that this new status as a net exporter is driven by shipments of refined products. The United States continues to import more crude than it ships out. It is solidly linked into the global oil market and will remain so.

And with tension now flaring with Iran, the fact that there are fewer sources from which to import the heavy, sour crude (containing high concentrations of sulfur) on which Gulf coast refineries depend is coming into focus. The United States imposed sanctions on Venezuelan oil exports in January 2019 and Mexico and Colombia are facing declining output as a result of a lack of new investment. For now, while Canada remains the biggest supplier to the United States, the Middle East delivers most of the rest.

Price matters

That brings me to the second reason that the United States remains dependent on oil flows from the Persian Gulf — and why it will remain so even if it buys none of the region’s exports: prices.

No matter where oil from the Middle East is sold, the volume coming out of the region still has a profound impact on crude prices as well as those of gasoline and diesel fuel. Nowhere is this more true than in the United States where low taxes on fuels mean their prices are much more responsive to movements in global crude.

The national average price of regular unleaded gasoline jumped by 10 U.S. cents a gallon — the biggest two-day increase in more than two years — after attacks in September on Saudi oil installations, even though the world’s biggest oil exporter was quick to reassure customers that there would be no disruption to supplies. The kingdom lived up to its promise, but it still took three months for gas prices to return to their pre-attack level. That shows just how important the flow of crude from the Persian Gulf still is to Americans — and their president.

For now, the killing of Iran’s General Qassem Soleimani and Iran’s responses so far have had a smaller but still noticeable impact on U.S. gas prices — even without any explicit Iranian threat to regional oil flows. If the mere prospect of a disruption to Persian Gulf oil flows can inflate U.S. gas prices, imagine what a real disruption, much less an outright halt, would do. No president would want that risk during a combative election year — and in that sense, the current incumbent of the White House is no different from his predecessors.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

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