Risk Report

POPULAR MYTHOLOGY  —  The United States imports the lion’s share of its oil from the Arab Middle East or Persian Gulf. FACT  —  In 2009 the US imported a grand total of 4.2 billion barrels of crude oil, roughly half of what we use.  What that means is we get nearly half of all the oil we use, FROM THE UNITED STATES!  —  MORE FACTS  —  Actual net imports of crude oil amounts to 51% of US oil consumption.  60% of these OIL IMPORTS, or 2.5 billion barrels, comes from NON-OPEC countries.  The remaining 40% of these OIL IMPORTS comes from OPEC nations (see yesterday’s blog for details of who they are).  Even more interesting is the fact that only 16% of all US Oil Imports comes from the Persian Gulf.Therefore US exposure to Mideast and/or Persian Gulf oil supply risk is actually only 16% of US oil consumption.   Price and market risk are an entirely different animal to be discussed later.  —  Which nations are the top suppliers of oil to the US?   —  As of June 2010  —  The top ten foreign sources of crude oil were: CANADA, MEXICO, SAUDI ARABIA, NIGERIA, VENEZUELA, RUSSIA, IRAQ, ALGERIA, ANGOLA AND COLOMBIA.   —   ANALYSIS  —  The United States effectively hedges its oil supply risk. More than 84% of US oil imports come from geographic areas outside the Persian Gulf.  More than 60% of US imported oil comes from non-OPEC sources.  —  The US is more dependent on Western Hemisphere oil sources than Middle East sources.   —  Instability in the Middle East creates fear of oil supply interruptions.  —  US national security policy focuses on creating and preserving regional stability.  —  Oil market makers such as OPEC have had greater influence on the price of crude in the last three years than in the last 25.  —  US oil risk hedging continues to focus on oil sources less at risk for political disruption and supply interdiction.     —  However, US foreign policy is casting a blind eye on creating strong security strategies and political relationships in the regions that supply the most oil to the US – North and South America.  —  MORE TO COME  —  FOCKER OUT!  —  Note: All data derived from US Department of Energy, Energy Information Administration, Petroleum Supply Annual 2010 

Environmentalists, politicians and journalists warn of the dire consequences of US dependence on foreign oil. The United States is accused of running a foreign policy based entirely on petro-centric interests and of fighting wars solely for the purpose of ensuring the free flow of oil at market prices. The US is criticized for its dependence on foreign oil, especially Mideast oil and for tolerating tyrants and despots in the quest for cheap affordable oil.So what is the truth about the US and its nasty little oil habit? In order to have a correct view of America’s oil interests, we must first understand US National Security Interests.

UNDERSTANDING U.S. NATIONAL SECURITY POLICY

1. Oil is the most critical natural resource of the global capitalist system and the stability of oil exporting regions is a critical US national security interest. This is why China, France, Russia, Mexico and most other industrial nations normally critical of the US are silent with regard to global oil politics.2. US national security policy is based on the concept of stability, not the free flow of oil at market prices. However –

a. Oil prices are very sensitive to instability.

b. Capitalism thrives on stability. Stability encourages investment, creates markets and enhances trade.

c. Stability normalizes the availability of essential raw materials so companies and investors will risk capital to build, create, sell, profit and eventually pay taxes.

Therefore, as a nation that lives and breathes economic supremacy via the capitalist model, oil is the lifeblood and stability makes it available in a constant and affordable market.Does the US get most of its oil from the Mideast?  No, we actually get most of our foreign oil from Mexico, Canada, Venezuela and then Saudi Arabia.  Therefore much of our supply risk exists in the Western Hemisphere. However, since oil is a commodity its price is set in the world market independent of location.  So lets try to understand this.

UNDERSTANDING THE WORLD OIL MARKET1. Oil is a commodity of varying qualities; therefore the source that supplies the highest quality (a characteristic that makes it easier to crack and turn into high quality distillates) will command the highest prices (we capitalists love that). Oil supplies of equal quality are priced based on several simple concepts – first, supply and demand (over production lowers prices); second, OPEC; and third risk (i.e. stability). 2. Oil is in huge supply, however; high quality crude oil that is easy to extract and deliver is not. Middle East oil is very high quality (sweet), they have lots of it and it is easy to extract and deliver. In fact many wells in Iraq, Saudi Arabia and Kuwait do not require pumps – the oil shoots out at high pressure. Wells in Texas and the North Sea require expensive methods (water injection) or infrastructure (oil well platforms floating in rough seas) to get at the “sweet” crude. Oil fields in the former Soviet Republics lie on the wrong side of major mountain ranges, complicating delivery.3. The US produces huge amounts of oil and could produce more except for one interesting fact – it is cheaper to buy oil outside the US than to exploit all of our more difficult to extract domestic sources.4. OPEC (The Organization of Oil Producing and Exporting Countries) is a cartel of twelve nations –  Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia the United Arab Emirates and Venezuela. Only six of which are located in the Middle East. Those five are: Iran, Iraq, Kuwait, Qatar, Saudi Arabia and United Arab Emirates.5. OPEC was founded by Venezuela (I didn’t know that!) as a way to calm the volatile market price fluctuations of oil while simultaneously ensuring a profit for its members. The market sets oil prices; prices are moved by fluctuations in supply, demand and perceptions of risk.6. OPEC tries to leverage supply to control the market price of oil by setting production quotas for its members. Many times OPEC members do not follow the quotas that are set.7. US national security policy works to increase regional stability, this mitigates oil supply risk. Watch for my next blog where we will examine US OIL DEPENDENCE.  Focker OUT!

This is my first post so I just want to say hello webworld.  You will find on this blog thoughtful analysis of the geopolitical situations we all face with specific emphasis on global political, economic and security risk.  If you are interested in knowing where my thoughts come from then click on the blogroll for Macro Strategies – that is my consulting company.  These are interesting times, so hang on… there is definitely more to come.  Focker Out!