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3 Reasons To Be Bearish On Oil

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Robert Rapier

Robert Rapier

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How The U.S. Has Reduced Its Dependence On Middle East Oil

With tensions in the Middle East high, I have fielded a number of queries on how this might impact the world’s oil markets. Today I want to explore that issue.

The Middle East presently produces about a third of the world’s oil. The most important producers there, ranked according to 2018 production, are:

  • Saudi Arabia – 12.3 million barrels per day (BPD)
  • Iran – 4.7 million BPD
  • Iraq – 4.6 million BPD
  • United Arab Emirates (UAE) – 3.9 million BPD
  • Kuwait – 3.0 million BPD
  • Qater – 1.9 million BPD

For reference, U.S. oil production in 2018 (per the BP Statistical Review) was 15.3 million BPD, which was more than the total from Iran, Iraq, and the UAE. (That number includes natural gas liquids, as do the numbers above).

It is also important to note that sanctions on Iran have impacted its ability to export oil. According to OPEC’s latest Oil Market Report, oil production in Iran fell by about 40 percent from 2018 to the end of 2019.

Before covering how much oil we get from the Middle East today, let’s look at the picture prior to the shale oil boom.

According to the Energy Information Administration, the high point for U.S. oil imports from Persian Gulf countries was 2.8 million BPD in 2001. At the time, that accounted for 23 percent of all U.S. crude oil imports (11.9 million BPD).

By 2008, U.S. oil production had begun to rise, but so had U.S. demand. Total crude oil imports had risen to 12.9 million BPD, but the share from the Persian Gulf had fallen to 2.4 million BPD (18.6 percent).

In 2018, the impact of U.S. shale oil production was readily apparent. Crude oil imports to the U.S. had fallen to 9.9 million BPD, and the share from the Persian Gulf had fallen to less than 1.6 million BPD (15.9 percent). Related: Are Oil Prices Still Too High?

Of the total crude oil imports from that region, 57 percent came from Saudi Arabia and 33 percent came from Iraq in 2018. These Middle Eastern imports are primarily coming into the Gulf Coast and West Coast. Canada is now the most important source of U.S. oil imports, supplying 4.3 million BPD in 2018 (43 percent of the total).

As a side note, although U.S. imports may seem high given the huge surge in U.S. shale oil production, it’s important to keep in mind that this is not a net import figure. The U.S. also exports oil and finished products like gasoline. The net import number has fallen from a high of 12.5 million BPD in 2005 to 2.3 million BPD in 2018. In fact, for the last two months reported by the EIA — September and October 2019 — the monthly net import number had become a net export number for the first time in at least 70 years.

So U.S. dependence on Middle East oil has fallen, but production of Middle Eastern oil has risen by about 5 million BPD in the past decade. So the rest of the world uses more oil from the region than they did a decade ago. Further, about 20 percent of the world’s oil passes through waters in the Middle East that border Iran. Thus, a fair amount of the world’s oil supply could be at risk if the situation in the region continues to escalate.

Should that happen, we will likely see a larger rise in the price of Brent crude (an international benchmark) than we will in the price of West Texas Intermediate (a U.S. benchmark). Without a doubt, the impact today would be far less than it would have been a decade ago. You can primarily thank U.S. shale oil production for that.

By Robert Rapier

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  • Mamdouh Salameh on January 16 2020 said:
    According to 2019 BP Statistical Review of world Energy, Saudi oil production in 2018 was 12.287 million barrels a day (mbd) while the highly authoritative 2019 OPEC Annual Statistical Bulletin reported a figure of 10.317 mbd. There is a difference of 1.97 mbd made up of natural gas liquids (NGLs) which come from natural gas wells as well as gases such as ethane, propane, butane and pentanes which don’t qualify as crude oil and have never been sold as crude.

    Another case in point is the United States. BP Statistical Review gave US oil production as 15.311 mbd which includes 4.349 mbd of NGLs. This means US production and Saudi production are 10.962 mbd and 10.317 mbd respectively.

    The real question is whether natural gas plant liquids can be sold as oil on the world market. The answer is a resounding “No”. In fact, major oil exchanges accept neither natural gas plant liquids nor lease condensates as satisfactory delivery for crude oil. And if major exchanges don’t accept them as crude oil, then they are not crude oil.

    Long before the US shale oil revolution, the United States has always had a policy of diversifying the sources of its oil imports. This partly explains the small volumes of US oil imports from the Middle East.

    However, in recent times and particularly under the leadership of the former Saudi oil minister Khalid al Falih, Saudi Arabia along with UAE intentionally reduced their crude oil exports to the United States for two reasons, the first is that their bigger and more important market is the Asia pacific region, and the second, according to Mr Al Falih, is to prevent the US from adding these exports to its oil inventory and then use them to claim higher build up to depress oil prices.

    And despite all the hype by the US Energy Information Administration (EIA) in cahoots with the International Energy Agency (IEA) and Rystad Energy, US oil production is overstated by at least 2 mbd and, therefore, US production averaged 10.3 mbd in 2019 and not 12.3 mbd as the US EIA claimed and is projected to decline to under 10 mbd or in 2020.

    As for US crude oil imports, there are two cardinal figures which determine US oil imports: domestic demand and production. In 2019 US demand reached 20.87 mbd and a production of 12.3 mbd (if we believe the hyped EIA figure). This means that the US imported 8.57 mbd in 2019.

    The US will never ever become self-sufficient in oil. Hype, self-delusion and falsification of figures will not change this fact.

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

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