Bad policies leave the US vulnerable to the Middle East oil crisis

The United States is the largest producer of oil in the world, pumping out about 13 million barrels every day. However, the US is also the largest consumer of crude oil, a major exporter and a country with an empty strategic oil reserve. Continental Resources founder Harold Hamm called the US “unusually vulnerable” to an oil shock.

Just a month ago, such a shock seemed quite unlikely. The war in the Middle East had been going on for a year and the oil supply had not been disrupted. That all changed this week after Iran launched a barrage of precision missiles against Israel, Israel said it would retaliate, and Iran said it would retaliate.

Within hours, the Middle East’s oil supply ceased to be secure. A day later, it became even less certain after President Biden told the media that the White House was discussing attacks on Iranian oil facilities with Israel. While not specific — the literal remark Biden made was “We’re talking about it. I think it would be a bit… anyway” – the very mention of such a discussion sent oil prices soaring. This is not a good time for US oil prices to rise

Related: Goldman Sachs sees $20 upside to oil prices on Iran supply shock

“They’ve exhausted the SPR and refinery inventories are at the lowest level in America (in years). And you just never know when you need it. It’s like having gas in your car,” Harold, founder and executive chairman of Continental Resources. Hamm told the Financial Times this week.

“We’re in an unusually vulnerable position … everyone is looking in the (Middle East) direction right now — and has been for the last four years — but we’ve had a president who, quite frankly, was not at home,” Hamm. added.

Hamm is not known for mincing his words and the comments the FT made are in character. These may be a bit harsh, but it is a fact that the United States’ strategic oil reserve is at its lowest level in 40 years, after the Biden administration released a massive amount of oil into the market in 2022 with the aim of to tame the rise in oil prices that followed the entry of Russian troops into Ukraine in February 2022.

Since then, however, the federal government has been slow to replenish the reserve, mostly because of high prices. Some have even argued that the US no longer needs such a strategic reserve, being the world’s largest producer. What these commentators seem to forget is that, firstly, oil is traded globally, and secondly, the US may be the largest producer of oil, but it is also the largest consumer, consuming about 7 million barrels more than it produces. And that makes it vulnerable to global price fluctuations.

Of course, a crisis is not necessarily imminent. However, the very suggestion that oil flows from the Middle East could be disrupted is enough to create tension in an economy that has only recently recovered to an extent that has finally convinced interest rates from the central bank could cut back a bit. The US is still economically fragile – not to mention higher oil prices a month before the election could be a killer for the incumbent party.

So far, the reaction of the oil markets to the latest events in the Middle East has been relatively calm. CNN’s Matt Egan said it “reflects a boy-who-cried-wolf mentality that has set in”. Indeed, since last year, traders seem to have ignored the possibility of an oil crisis, because whatever happened in the Middle East, Iran remained silent. However, that changed this week.

“This is going to get worse before it gets better. The story of the village boy who cried wolf did not end well — for the village or for the boy,” Bob McNally of Rapidan Energy Group told CNN’s Egan. In the case of the American “village,” Continental’s Hamm saw the Biden administration’s crackdown on oil and gas as bad policy, calling it “short-sighted” and blasting the administrator for compromising energy security in difficult geopolitical times.

The FT cited an unnamed Biden administration official who countered the criticism with a statement that the current federal government had actually boosted US energy security by doubling down on the energy transition and buying oil for the SPR.

“People said this would destroy the market, but it didn’t. People said then we’d have $100 oil this year, but we don’t. People said we wouldn’t be able to fill the SPR. But we fill the SPR- “We put a plan together in January 2022 and we’ve stuck to it despite all the dire predictions,” the official said.

Currently, there is approximately 19 days of emergency oil supply in the SPR. It should be enough if prices rise for a short time. As for $100 oil, that could happen, unless someone defuses the geopolitical bomb in the Middle East. These are exciting times, and they seem to be exciting even for the world’s largest oil producer.

By Irina Slav for Oilprice.com

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