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Trump’s Saudi Oil Threat Is A Hollow One

This week we had the questionable pleasure of reading about Saudi Arabia’s Oil Minister pointing a finger at President-elect Donald Trump for his threats to suspend Saudi crude oil imports as part of its ambition to make the country energy independent.

Khalid Falih’s words were rich in references to free trade and healthy international trade, but he might as well have spared his breath. The U.S., for the time being, is not in a position to suspend Saudi Arabian oil imports, and it’s all because of U.S. refineries.

Most U.S. refineries need a mix of light and heavy crude to function properly. Shale oil is light. The heavy crude that has to be added to it to produce fuels and lubricants comes from Canada at a rate of 3.8 million bpd, Saudi Arabia at 1.14 million bpd, and a spattering of other countries at much lower daily rates.

The peculiarity of refineries is that they can’t operate at half their capacity, as geoscientist and petroleum engineer Tad Patzek noted back in 2014, when the price slide began. They need to operate at close to 100 percent constantly, save for two sessions of seasonal maintenance a year.

In other words, refineries are constantly hungry for not just local light crude, but heavier blends as well, and these almost invariably come from abroad, be it Canada, Saudi Arabia, or Venezuela.

From this perspective, complete energy independence is impossible: if imports from Saudi Arabia are suspended, the U.S. Gulf Coast refineries will need to bring in heavy crude from another source. As Reuters commentator John Kemp notes, it too will have to come from abroad, whether that’s from Iraq, Iran, or…. even Russia.

Eliminating imports is also a tough sell because of the political influence wielded by Big Oil. Exxon, Chevron, and their same-size rivals on the U.S. market are all international companies, which in the refining context, means they can feed their American refineries with heavy crude from West Siberia, if they’d like. These major international oil companies would not look kindly on any import ban.

Related: Saudis Announce OPEC Output Ceiling: 32.5 Million Bpd

Further, as Kemp reminds us, both the U.S. and Saudi Arabia are members of the World Trade Organization, both bound to uphold free trade. It was very likely that Falih was referring to this fact in his cautionary note to Donald Trump.

On top of this, the crude that America imports from Saudi Arabia turns into fuels and other oil products that are then exported globally. It is ill-advised to trample your friend’s exports when they enable yours, albeit partially.

The U.S., according to the EIA, consumes around 19.4 million barrels of crude daily, most of it in the form of oil products. Exports of crude are for now still restricted, but this may change in the next four years. One of Trump’s closest advisers, Harold Hamm, spearheads the pro-export lobby. That’s a whole new conundrum for the President-elect: crude oil exports would certainly help shale boomers and other independents, but will deepen America’s reliance on imports, too, making the energy independence perspective more distant.

By Irina Slav for Oilpice.com

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