On September 14, 2019, explosive drones took out one of Saudi Arabia’s major oil refineries which accounted for nearly 6% of the world’s oil supplies (5.7 million barrels a day). Standard media hysteria and public concern arose with the belief that Americans would soon see $4.00 a gallon gasoline across the nation.
Within days, the reaction was muted. This was because US oil supplies have increased 40% in the past three years (3.65 million barrels since the end of 2016). Worldwide reserves should soon demonstrate that oil shocks like the Arab Oil Embargo of the 1970s are now truly a thing of the past. In the US alone, we are just seeing the beginning of continued increases. The West Texas Permian Basin will increase another million gallons per day in the next few months as new pipelines come on board to take oil to market. Four thousand more wells sit idle waiting for Hydraulic Fracturing once transport of the new oil is assured.
Saudi Arabia restored half the production within a week and reached out to other countries to gain oil to supply all its clients with contracted oil. They are paying a premium to the construction companies helping to build back their own supply within a few more weeks.
A seemingly well-kept secret is that the International Energy Agency (IEA), consisting of 30 oil consuming nations including the United States and Canada, coordinate their energy security. They can all release oil from their strategic reserves when necessary. President Trump authorized a release unilaterally while IEA did not yet see the need. Their rule of thumb is to do nothing until 7% of global supply is affected. This last happened during the Libyan civil war in 2011 when IEA ordered the release of 60 million barrels of oil collectively from its 30 nations.
Last week, IEA reported that crude oil stockpiles around the world had increased by 2.4 million barrels even though analysts had expected a decline. In fact, there is now considerable worry about an over-supply around the world being affected by the US-China trade war. Concurrently natural gas prices have declined for two months.
On September 15, President Trump tweeted that, if necessary, he would have the US Strategic Petroleum Reserve (SPR) drawn down but it was not necessary to hold US prices down. Currently the US holds 644.8 million barrels valued at more than $35 billion at current prices, in four locations in Texas and Louisiana in underground salt caverns. The oil can be extracted at any time by pumping water into the bottom of the caverns and forcing water out the top, but it takes about two weeks to draw off significant quantities.
At its peak, the US Strategic Petroleum Reserve contained 726 million barrels in 2010. The US has been selling off some of that thought to be unneeded for its security in recent years, leaving its current volume at 644.8 million barrels.
All data and current history should point to the end of the sudden distorted shocks that send oil prices up without valid statistical support. As usual, most of the media promotes the worst-case fears and are not expected to tone down their creative hysteria. After all, fear sells, be it TV, internet, radio or print media.
There is always hope that the quick dissipation of this shock might actually spell the end of imaginary disruptions. That goes as well for the weakening impact of the once-strong threats of the Organization of Petroleum Exporting Countries (OPEC) to drive prices up at the pump. Commodity cartels have generally had a poor record of elevating long-term prices that markets actually dictate. OPEC will not likely stop trying to get their members to limit production in an attempt to boost prices but the world is starting to pay less and less attention.
Every price hike caused by OPEC spurs cheating from quotas by cartel members or an increase in production by oil producers not in the cartel. With the United States returning to its position as the world’s largest oil producer as a result of hydraulic fracturing and horizontal drilling, Middle Eastern oil shocks will be falling on deaf ears.
In the United States and Canada, the population is slowly waking up to the fact that we are no longer held hostage by the Middle East to have an abundant oil supply. America is again the greatest source of the world’s oil, as we once were long ago. Memories of peak oil, the idea that the world was soon to run out of oil, are fading in our memories. Reasonable predictions of how long our known supplies will last at current rates of utilization are beginning to range into many centuries. In the ground, in our minds, and one day perhaps even in the media, short term fears generated by energy shortage shocks will become a thing of the past.