Weaning off Middle East Oil Means Less Than you Think

One expects the crazy talk to come out during an election season, but reports that the US is close to being weaned off Middle Eastern oil and set to become “independent” purposefully fail to consider the fact that as long as America is dependent on oil it will be dependent on Middle Eastern supplies because crude prices are determined globally.

Let’s put America’s foreign oil dependency into perspective. In order to achieve independence from foreign oil imports, the US would have to find a replacement for the approximately 8 million barrels of oil it imports every day. There are plenty of factors that can contribute to reducing these imports, including increased domestic oil and gas production, improved fuel economy standards, and renewable energy.

According to the Wall Street Journal, the US could become completely independent from Middle Eastern oil by 2035 primarily because of increased oil and gas production in the US and Canada (plus imports from Brazil) thanks to the technological advance found in hydraulic fracking. As a side note, renewable energy is mentioned as a potential contributor to energy independence.

This opinion nicely complements that of ExxonMobil CEO Rex Tillerson, who admits that while oil production is causing climate change, renewable energy is a bunch of malarkey and oil independence boils to down drilling as much oil as possible at home. This is also primarily the Republican platform at present.

The US Energy Information Administration anticipates that by 2020, the US will fill half of its crude oil demand through domestic sources. OPEC opines that by 2035, shipments of oil from the Middle East to North America “could almost be nonexistent.” Fair enough. We are talking here only of production and access to crude oil supplies—not pricing.

The most blatantly misleading remark, however, comes from Carlos Pascual, the US State Department’s key energy official. According to Pascual, “Whereas at one point there were real and serious concerns about the ability to maintain sustainable access of supplies to the United States if there were disruptions in the Middle East, that has changed.”

We beg to differ.

Here’s one point everyone must agree on (and Tillerson will be the first to agree): Crude prices are determined globally and prices are affected by factors that ignore origin. As such, to say that the US is no longer concerned about disruptions to oil supplies from the Middle East is not only premature, it is wrong. Disruptions to supply in the Middle East, for instance, reverberate globally, regardless of whether you are drilling at home or importing.

If Saudi Arabia were to undergo a latent Arab Spring scenario, or if, for instance, the Houthi rebellion in Yemen were to effectively spill over into Saudi Arabia’s eastern oil-producing province, which is incidentally dominated by a restive Shi’ite minority with sympathies for the Houthi cause, this would affect supply, which would in turn affect the price of oil globally. The significant increase in oil production in the US and Canada would shield the US from diminished access to supplies, but the end result would be the same: a massive increase in prices for domestically produced oil.

This is simple supply and demand. ExxonMobil, for instance, is not going to sell its domestically produced oil at a lower price in order to stave off a crisis at home. It will sell it for whatever price it can get, or it will export it for a better deal.

This is not to say that weaning the US off of Middle Eastern imports is not a significant development. Certainly, it is. But it must be put into perspective—a perspective that is global and which reflects what is undoubtedly the most important aspect of the equation: pricing. Ask just about any American. They don’t care where the oil comes from as long as it translates into cheaper prices at the pump and cheaper utility bills.

Overall, Americans are being misled about the nature of their dependency. Too much focus on removing the “foreign” element in the foreign oil dependence equation is skewing the larger picture: Independence can only be achieved by tackling dependency on oil itself, not on the origins of oil.

Any major revolution of any kind, be it a political revolution or an energy revolution, is generally a process of two steps forward, one step backward.

Renewable energy brings us two steps forward; increasing domestic oil drilling brings us one step backward, in terms of environmental aims (fracking has been linked to earthquakes and groundwater contamination). It is important to note that fracking does not bring us two steps backward so that we are progressing nowhere in terms of energy independence. While there are dubious implications for the environment, fracking has allowed the US to become the world’s largest producer of natural gas, and this also helps keep prices down. This balance is a necessary part of any transition process.

OilPrice.com