Greg Abbott, governor of the state of Texas, hailed the US as an energy independent country last week, saying on Twitter it would “NEVER AGAIN” be beholden to foreign oil producers.
Yet the day before, Saudi Arabia — backed by Russia — pledged a “measurable” rise in output, largely in response to a request by the US to offset a loss in Iranian barrels after the reimposition of oil sanctions.
As the US tries to reset the Middle East, with the withdrawal from the nuclear deal with Iran a key element of its strategy, it is still turning to the energy might of traditional producers abroad.
This reflects in part the limits of the US shale oil boom, and Washington is acutely aware of the domestic blowback should any move to cut Iran’s oil exports to zero result in higher petrol prices for American drivers.
“The US still needs Opec to provide relief on oil prices,” said Jason Bordoff, director at Columbia University’s Center on Global Energy Policy. In an integrated oil market, US pump prices are affected by global supply disruptions regardless of how much the country produces or how little it imports, he added.
Productivity in the US shale oil industry has been soaring
US shale output has helped total domestic production more than double since 2010 to nearly 11m barrels a day. But the US remains heavily reliant on imported crude oil, bringing in about 8m barrels a day so far in 2018.
While that import level is about a third lower from 12 years ago, with a significant amount coming from Canada, it still brings in nearly 3m b/d from Opec countries. That US reliance leaves it exposed to international prices, despite the rhetoric around energy independence.
The country’s refineries also require heavier grades of crude from overseas alongside lighter, sweeter, US crude from shale fields, which is not always well suited.
It was not able to offset the impact of supply cuts led by Opec and Russia over the past year, which coincided with robust demand and unplanned outages from Venezuela and others.
With the US midterm elections in November in view, US president Donald Trump blasted Opec for “artificially” raising prices. But it was his aggressive stance on Iran that really took prices a leg higher.
This week the US State Department stressed its reluctance to grant widespread waivers to big consumers of Iran’s oil, adding to bullish sentiment.
“I’m stunned by this latest US decision,” said Helima Croft, RBC Capital Markets’ global head of commodity strategy, who said the US was only stoking prices with its hardline approach to Iran. “The US just needs to hope no other producer goes down. This is a high stakes game . . . There is no margin for error,” she added.
Average petrol prices across the US are up more than 50 cents a gallon compared with a year ago, while US West Texas Intermediate crude has risen more than 40 per cent over the same period above $73 a barrel to 2014 levels.
Oil price: what to look out for
It is no wonder that the US had to turn to Saudi Arabia, its long-term ally and arch-rival of Iran, to help calm domestic oil prices as it simultaneously tried to cripple Tehran.
But this is a gamble in itself. Questions are mounting about the kingdom’s effectiveness in managing another price surge, which has already provoked the ire not just of Mr Trump but other big consumer countries such as India.
Saudi Arabia and Russia, countries with the largest additional output capabilities, have said producers would add 1m b/d of oil into the market, paving the way for the kingdom to flout production limits agreed among producers.
Saudi Arabia has briefed energy analysts that its domestic production could rise well above 10.6m b/d from July, even hitting record levels around 11m b/d. Still, all this talk of additional supply has yet to soothe crude prices with international benchmark Brent again approaching $80.
Analysts say a big supply increase will only test the production limits of oil nations. Venezuela’s output is still spiralling lower and Libyan oil is again at the mercy of the country’s politics. Bullish factors are present even before Iran’s exports have dropped.
Jamie Webster at the BCG Center for Energy Impact said “slashing Iranian exports while keeping US fuel prices low will require much more crude from other Opec members, leaving scant spare production capacity, further increasing the difficulty of holding both goals.”
Saudi Arabia — which has 2m b/d of available supply capacity — has signalled it will meet much of the 1m b/d increase, but there are only finite amounts other countries such as non-Opec Russia and Opec peers Kuwait and the UAE can contribute.
The latest round of sanctions are expected to be more aggressive than under the Obama administration, and even if China fails to comply, others might, meaning a 1m b/d raise might not be enough if other supply outages take place.
US shale industry advocates hope the rise of domestic production and its so-called “energy dominance” will eventually end the country’s reliance on foreign oil producers.
US energy secretary Rick Perry has shown hesitance about using the country’s strategic petroleum reserve as a tool to manipulate the market, even as it has three times the amount of oil stocks members of the International Energy Agency are required to hold.
This stands as one weapon in the US’s armory and a growing number of market watchers believe the US could be forced into using a page from the Opec playbook.
Until then it is reliant on its enemies and allies abroad.
