You may have heard that the United States is “energy independent.” President Trump mentioned this on Jan. 8 when announcing new sanctions on Iran, and it’s true that new drilling technology has made the United States the world’s largest oil producer. Last year, U.S. oil exports even exceeded imports.
But the United States still depends on foreign oil. And U.S. consumers remain vulnerable to price hikes that might occur as the result of hostilities in the Middle East or supply disruptions. “In the real world, energy independence doesn’t exist,” says oil analyst Dan Dicker, founder of research firm The Energy Word. “We still have tremendous amounts of imports.”
Most U.S. oil comes from five states: Texas, North Dakota, New Mexico, Oklahoma and Alaska. Once extracted, it goes to refineries, and then to end users. But oil products don’t flow freely around the United States, like cars on the interstate system or planes in the sky. Instead, there are regional limitations on pipeline capacity and other forms of transport. And different grades of oil products are only suitable for certain areas, requiring highly specialized supply chains.
“Sometimes it’s a lot cheaper to get cargo from Rotterdam to the East Coast than to push it from Texas,” says Dicker. “It can be immensely cheaper to take oil from the Middle East than from our wells in West Texas.” It’s also more cost-effective to ship some U.S. oil to foreign markets than to sell it domestically—especially southern oil easily shipped to ports such as Galveston and Corpus Christi, where it can be loaded on tankers bound for foreign markets.
Less dependent on foreign oil
So while the U.S. consumes about the same amount of oil as it produces, it still imports about 4 million barrels of oil per day, which is about 20% of total consumption. U.S. oil imports are less than half what they were at the peak in 2005, which makes the U.S. less dependent on foreign oil. But oil supply and prices elsewhere still directly affect American consumers.
Since oil is a globally traded product in a highly liquid market, prices are set by global supply and demand—not by production in any single country. A supply shock anywhere will raise prices everywhere, because most oil producers can sell into markets where the price is highest. The United States used to have strict limits on exports of domestically produced oil, but it lifted those in 2015 as U.S. production soared and memories of the damaging Arab oil embargo of the 1970s receded.
The bottom line for Trump is that any development in the Middle East that pushes oil to $100 per barrel or higher will directly raise oil and gasoline costs for American consumers and businesses. The natural gas market is different, because gas is much harder and costlier to move by ship, which requires liquification. That leaves hundreds of regional natural-gas markets in the world, where proximity to the fuel and ease of transport determine prices. U.S. natural gas production has been rising along with oil, and the U.S. is now a net exporter of gas as well. Most of those exports go to Canada and Mexico via pipeline.
The United States is lucky because it can produce more oil, if necessary. If world oil prices rise, that creates an incentive in the United States (and elsewhere) to drill more. Some wells that are unprofitable with oil at $60 per barrel, say, might earn money if oil rises to $80 or $100. But drillers have become reluctant to tap costlier wells as prices rise, because the increased supply typically pushes prices back down and makes marginal wells money-losers again. So it’s not clear how suppliers would react if a Middle East crisis really did send prices soaring.
It’s probably a safe bet that any spike in oil prices would be short-lived. For all the drama in the Middle East, oil prices have been depressed during recent years as new supply has come online in the United States and elsewhere. And demand is flatlining as more people conserve, and carbon alternatives such as solar and wind catch on. Someday, Middle East oil may barely matter to Americans.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: [email protected]. Encrypted communication available. Click here to get Rick’s stories by email.
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