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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Shale Boom Changes U.S. Position In Persian Gulf Conflict

The recent spike in tensions between the U.S. and Iran has pushed oil prices higher mostly because of the possibility—however slim—that Iran may decide to go through with its threat to close off the Strait of Hormuz and cut off the supply of millions of barrels of crude daily to global markets. Twenty years ago, this would have been horrible news for the world’s top consumer. Now, not so much.

Energy analyst David Blackmon wrote in a recent article for Forbes that the United States does not need to police the Strait of Hormuz anymore because it no longer depends on imports from the region: its Persian Gulf imports have slipped from about a sixth of consumption in 2012 to less than 10 percent last year: the average 2018 consumption was more than 20 million bpd; imports from the Persian Gulf hovered around 1.5 million bpd in the final quarter of the year.

No one would be surprised to hear that the reason for this was rising shale oil production. The shale patch helped the U.S. to become not just the largest producer of oil in the world last year but, more importantly, a lot more self-sufficient in the oil department. This self-sufficiency has affected, it seems, imports from the Persian Gulf particularly hard.

The latest monthly data from the Energy Information Administration shows that oil imports from the Persian Gulf stood at some 1.1 million bpd, out of a total 8.84 million bpd. The U.S. imported four times as much oil from Canada as it did from the Persian Gulf in that month and this will likely continue: Gulf Coast refineries need heavy crude and they can easily get it from Canada rather than ship it from the Middle East. What this means is that the U.S. is pretty much immune from Strait of Hormuz supply disruptions.

President Trump has said as much when he suggested that countries that are a lot more dependent on oil from the Middle East should protect their own tankers rather than count on the U.S. military to police the Strait. He did so in his typical blunt manner, but manner aside, the facts can hardly be disputed. The shale revolution has made the country a lot less vulnerable to supply disruptions in geopolitical hot spots. Related: Why OPEC Wants Oil Below $60

This revolution has not been without its problems, of course. The fast-rising production has created a glut of light crude, which has pressured prices and producers’ and refiners’ margins. The bigger problem is the fact that most shale producers are running on debt. Only 10 percent of these have a positive cash flow, according to consultancy Rystad Energy. The rest are burning cash even with higher prices.

And yet, despite this, production continues to grow. The EIA said in its latest Drilling Productivity Report that shale oil production would hit 8.52 million bpd next month, a new record and a 70,000-bpd increase on June.

The U.S. will hardly become completely self-sufficient with oil overnight. However, imports are falling and there is always more than one source of oil should anything happen to the preferred one. So, in this sense at least, the U.S. does not need a presence in the Strait of Hormuz. China does as it gets a lot of its oil from the Middle East, but the U.S. will hardly let it replace it there for reasons that have nothing to do with energy and everything to do with regional influence.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on June 29 2019 said:
    The United States' presence in the Arab Gulf in the vicinity of the Strait of Hormuz has nothing whatsoever to do with shale oil and everything to do with geopolitics. The US has its Central Command based in Qatar to ensure that it controls global oil supplies on the premise that whoever controls these supplies and oil’s shipping lanes and chokepoints controls the global economy.

    The US has been for years reducing its dependence on Arab Gulf oil by diversifying its oil import origins. The US currently imports less than 1.1 million barrels a day (mbd) of oil from the Gulf. In 2018 the US imported 9.6 mbd from all over the world being the difference between a consumption of 20.5 mbd and production of 10.9 mbd.

    The claim by President Trump that the United States protects the oil-producing countries of the Arab Gulf is a brazen and crude attempt of blackmailing these countries and getting US hand on their money. The only threat facing these countries is Israel which is provided with money and the most sophisticated weaponry by the United States to maintain its threat and military supremacy in the Middle East. America and Israel are one and the same and they pose the most serious threat to countries of the Middle East.

    I will cite three examples of how the United States has been ogling Middle East oil. One example is the invasion of Iraq in 2003. This invasion was undoubtedly about oil (Mamdouh G Salameh’s “Over a Barrel”, page 191). Even the veteran ex-chairman of the US Federal Bank Alan Greenspan has admitted that the Iraq war was largely about oil (Alan Greenspan’s “The Age of Turbulence, page 463). While the US won the military battles, it lost the war. The real winners were China whose investments in Iraqi oil industry are the biggest and Iran which has the most political influence in Iraq.

    Another example is the emergence of the petrodollar. The petrodollar came into existence in 1973 in the wake of the collapse of the international gold standard. Former president Richard Nixon and his then foreign secretary Henry Kissinger understood that the collapse of the gold standard system would cause a decline in the global demand for the US dollar. So the United States under Nixon forced a deal in 1973 on Saudi Arabia under which the Saudis would agree to price all of their oil exports in US dollars exclusively and be open to investing their surplus oil proceeds in US debt securities. In exchange, the United States offered weapons and protection of Saudi oilfields from neighbouring countries.

    The petrodollar system provides at least three immediate benefits to the United States. (1) It increases global demand for US dollars. (2) It also increases global demand for US debt securities and (3) it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical terms, the petrodollar lends vast economic and political power to the United States. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.

    However, the petro-yuan is already starting to undermine the petrodollar by accounting for 32% of all traded oil. Within the next 15 years, the yuan could overtake the dollar as the reserve currency of the world with the petro-yuan becoming the oil currency of the globe.

    A third example is the control of the world’s major oil chokepoints. In any future conflict between the United States and China, the US will try to starve China of oil. Most of China’s oil imports come from the Middle East. China’s oil imports will have to pass through two major chokepoints: the Straits of Hormuz and Malacca both of which are guarded by US Navies.

    The United States will never ever become completely self-sufficient with oil. In fact, the volume of its imports is projected to increase in coming years as a result of a projected slowdown in shale oil production and rising domestic consumption.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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