Guest blog by S. A. Shelley: In the past few months, a lot of people around the world have probably wondered about why oil prices have again quickly and significantly fallen. I’ve argued in a prior blog at the beginning of this year that the world is awash in oil supply. Even though oil production is collapsing in places like Venezuela, Iran and Mexico, is in danger of collapsing in more places like Angola and Libya, and is politically constrained in places like North Venezuela (Canada), there still is plenty of oil to supply most global markets. The plentiful supply of course comes from surging production in the U.S., ample production in Russia and new offshore fields coming on stream in places like Guyana and Brazil. If you couple increasing supply with softening global demand for oil, you get such downward pressure on oil prices. So what’s with this nonsensical sport of shooting tankers in the Gulf of Oman?
Comparing oil imports from the Middle East for both Europe and the U.S. shows some interesting trends. Over the past dozen years or so, the U.S. has been quietly and consistently reducing the amount of oil it imports from the Middle East. Europe on the other has started to increase the amount of oil it imports from the Middle East (Figure 1).
If we examine the data for oil imports from the Middle East as a percentage of oil demand (Figure 2) we see that in recent years the trend has been worse for Europe and better for the U.S. The Europeans appear to have become more dependent upon Middle East oil while the U.S. has become noticeably less dependent upon Middle East oil.
In case of a major crisis in the Middle East, who do you suppose will have a more difficult time adjusting to any supply shutdowns, Europe or the U.S.?
If push comes to boom in the Persian Gulf, the U.S. does not need Middle East oil anymore. At this time, the U.S. is in a position to effectively say, “No more American lives for Persian Gulf oil, you sort it out yourselves.” With a bit of emergency demand curtailment here and there of only 8% or a bit of additional ramping up of on-shore supply, the U.S. can and should ride out the next big Middle East war.
Which leaves the Europeans hanging in the wind. Europe is way more dependent upon Persian Gulf oil than their political leaders like to admit or that their populace knows. If anyone needs to send ships, aircraft and troops to the Middle East to protect their oil supply and their remaining democratic and economic system, it’s the Europeans. If they lose Middle East oil there will be devastating impacts on their economies and societies. Fortunately (and unfortunately) the Europeans have the Russians from whom to buy oil, as much as the Russians will sell subject to politics. So instead of fighting, the Europeans can chose to capitulate to the Russian oligarchs, in which case the Europeans will consign to history their freedom and liberal democratic values. Suck it up Europe, you better stop bickering internally and pull together because for the near future, both Russia and the Middle East have you over a barrel.
What about Japan or South Korea? Forget it – they can’t protect enough of their oil shipments. Japan imports 80-% of its oil from the Middle East. Korea is in a similar situation. At best these nations can hope for additional oil shipments from the U.S. and maybe a few extra barrels from Canada.
What about China? They can, and they probably will, protect their tankers, but that won’t help much if a Tanker War expands to include a Refinery and Production Field war. China imports just under half of all its oil from the Middle East, and China is becoming a local player with assets in the Persian Gulf. However China, like Europe, has the option of turning to Russia for more supply. But, unlike Europe, China can probably buy Russian oil without having to worry about Russian political terms.
India is in a similar situation as China with respect to Middle East oil, though India’s volumes are lower, and, in case of emergency, India could survive oil supply shortages much better than China.
The rest of the world should survive a Tanker War relatively unscathed.
What about the probable belligerents in a potential Tanker War in the Middle East? Everyone will suffer. At this moment, the Tanker War seems to be starting because one of the principal belligerents is facing economic collapse, precipitated largely by various sanction regimes. A Tanker War will only accelerate that state’s total economic collapse. Oil is money in the Middle East. As soon as the shooting starts, oil flows will fall, and, while the price of oil will spike, the volume of money necessary to keep principal belligerents fiscally solvent will be insufficient. Whatever the thinking in various headquarters in the Middle East, a Tanker War will not help anyone anymore. Short and quick might bring about a regime change (whose?); long and drawn out, will accelerate oil demand collapse in the rest of the world as nation states realize that it is better to wean themselves off oil as much as possible because of all the inherent economic and political risks associated with it.
Currently, OPEC supplies about 30% of global oil demand and it is now possible for the rest of the world to adapt existing alternative energy technology in sufficient volume to cut oil demand and to use new production technology to increase supply from more rational and stable nations. It will just take time, maybe just 10 years if push comes to boom or 20 years with appropriate planning and investment.
P.S. Data used for Figures 1 and 2 taken from the U.S. EIA and the European Commission Directorate-General for Energy.