Opinion Leaders
A turbulent oil market
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Alexis Bienvenu
Fund Manager
La Financière de l’Échiquier (LFDE)
The United States is awash with oil.
It is, by far, the world’s leading oil producer: over 21 million barrels per day in 2023, across all petroleum products, including more than 12 million barrels of crude, compared with around 10 million each for the second and third largest producers, Saudi Arabia and Russia[1] . This accounts for over 20% of global production. And the trend is upwards.
The country is also one of the world’s leading exporters of petroleum products of all kinds: over 6 million barrels per day.
However, the blockade of the Strait of Hormuz since the start of the US-Israeli offensive against Iran in late February has led to a drastic rise in petrol prices in the United States: up 20% as of 13 March. At $3.60 per gallon – just under $1 per litre – petrol prices are approaching their record highs of 2023 and 2024, although they remain well below the 2022 peak of $5 per gallon.
How can this paradox be explained?
In reality, whilst the United States is awash with oil, its consumption remains fundamentally dependent on foreign imports. This is because the crude produced domestically is ill-suited to local refineries and distribution networks. Domestic production consists mainly of light, low-sulphur oil, whereas the refineries were built decades ago to process heavy, high-sulphur oil. It is therefore necessary to import oil that differs from that produced domestically. Furthermore, refineries and storage facilities, located mainly in the Midwest and around the Gulf of Mexico – or ‘America’, in Trumpian parlance – are far removed from the main consumption centres on the East and West coasts, which are largely equipped with terminals to receive foreign oil. Finally, a 1920 law, the Jones Act, stipulates that cargoes – including oil – transported between two US ports must be carried on ships built, owned and operated by Americans, which hinders competition and makes domestic transport significantly more expensive.
The result is that oil production and consumption are out of sync, to the detriment of consumers but to the great benefit of producers, who are benefiting from a rising global oil price whilst their production costs remain unchanged. The MSCI USA Energy Index has thus soared by 28% since the start of the year, whilst the broader S&P 500 Index was down 2% as of 12 March.
Faced with this pressure on the American consumer, who will soon be casting their vote in the mid-term elections scheduled for next November, the Head of State, ultimately responsible for this surge, cannot sit idly by.
He is therefore considering temporarily suspending the Jones Act, a rare move. He has agreed to release 172 million barrels from strategic reserves, as part of a coordinated global effort through the International Energy Agency – but this release will take time. He has authorised other countries to purchase Russian oil stored on tankers. , he is considering the possibility of suspending a federal tax on petrol, which brings in 18 cents per gallon – around 5 cents per litre – and is crucial to the US budget.
Many other forms of intervention on petrol prices remain conceivable – let us bet that the ‘deal-maker’ president will not lack imagination in this regard.
But in the medium term, whatever mechanisms are deployed to cushion the blow, there will still be a 20% shortfall in global oil supplies as long as the Strait of Hormuz remains blocked – and, indeed, a shortfall in some of the world’s gas and fertilisers, which are critical to industry and agriculture respectively.
Faced with this impasse, either negotiations get underway and the strait becomes navigable once more, but at the cost of what political concessions? Or the United States attempts to take military control of the strait, which will not happen without causing a stir. In any case, significant costs – political, diplomatic and financial – are inevitable, and the United States may well have underestimated them. It is time for the famous ‘Art of the Deal’, hitherto well hidden, to be deployed, so that Trump, in turn, can part the seas.
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Disclaimers
This information and these opinions, as well as the sectors and securities mentioned, are provided for information purposes only and therefore do not constitute an offer to buy or sell any security, nor do they constitute investment advice or financial analysis. The opinions are those of the author and do not in any way engage the liability of LFDE. Past performance is not indicative of future results.
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1Source: Energy Information Administration – www.eia.gov/tools/faqs/faq.php?id=709&t=6
