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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