Oil is one of the few bright spots in the economy now. Last September the price rose to nearly $94/barrel, and market commentators predicted it would hit $100 and then go even higher. Fortunately, they were wrong, and cash-strapped consumers got a much-needed break. The question now is: “How much longer will the good times last?”
In large measure, the apparent calm in the oil market is credited to close ties between the US and Saudi Arabia, which has the world’s second largest reserves of oil according to the State Dept. and pumps nine million barrels daily. The Saudis price their oil in dollars, which has important economic benefits for America and, in return, the US provides military protection for them.
Over the years, the Saudis have purchased more weapons than any other country – over $90 billion. Saudi Arabia is the third leading source of imported oil to the US and the US is Saudi Arabia’s second largest trading partner in the Middle East, according to Wikipedia. Given the interdependence, the close relationship could last for many more years.
But will it?
Not Calm At All
The fact is that the oil market is not nearly as calm as it appears to be. Consider these facts: Since 2023 the Saudis have cut production by a million barrels/day; Russia cut its production by 500,000 barrels; Iraq by 223,000; the UAE by 163,000 and Kuwait by 135,000. Other oil-producers have made smaller cuts.
Influential parties in the US oppose producing and using oil. And America’s once abundant Strategic Petroleum Reserves has been diminished to dangerously low levels. Does all this sound to you like happy days are here to stay for the oil industry? Or does it sound like the calm before a potential storm?
The US gets most of its own oil from two sources: traditional drilling and shale rock formations. Shale is used to make bricks, tile, and cement; more importantly, natural gas and petroleum can be extracted from it.
There’s an important difference between these sources. Traditional wells generally produce a steady amount of oil for a long time. Shale oil wells (fracking) are different. Initially, they produce a great deal of oil, but production declines rapidly. These days, America gets most of its oil from shale oil wells.
Market commentator and accountant Steve Poplar says that “Production from shale wells will decline dramatically without continual investment.” And the US is not investing sufficiently in these wells to maintain the level of production that the country needs. He says there already are indications that oil production is starting to decline. In the past, when the world needed more oil, the Saudis answered the call; but this may not be possible in the future.
According to Poplar, the Saudis embellish data about their reserves, claiming they can easily increase the 9 million barrels/day they are pumping now to 12 million barrels. But that may not be possible, as some of their equipment is broken and they are pumping some wells dry. And they know they’ll never get production from them again. Despite this, they refer to them as spare capacity.
“The ‘spare capacity’ they have has been reviewed by many analysts and shown to be a pipe dream,” Poplar says. Although the Saudis have been pumping oil aggressively for years, the official estimate of their remaining reserves has not changed in 20 years, he says.
“Maybe Ten”
One analyst described the situation this way: The Saudis are pumping nine million barrels now and, in an emergency, may be able to raise this number to ten million barrels. However, he adds, oil markets believe that if there were a major disruption, the Saudis could quickly raise their production to 12 million barrels – but this is just a pipe dream. To do that, they would have to restart wells around the country and import new equipment among other efforts. But even if these implementations were successful, depending on the reason for the disruption, they might not be able to ship any oil out of the Straits of Hormuz.
That’s why Poplar believes the oil industry is fragile. “If oil shipments from the Middle East are disrupted, the Saudis can’t come to the rescue because they cannot increase their production by very much. So what will the United States do? Frack more? There’s a limited number of rigs available and a limited number of skilled workers. If there’s a problem yes, the US will ramp up fracking, but it will take time until that has a significant impact. The US simply can’t expand production very quickly.”
All Oil Is Not The Same
Oil produced by fracking is different than other oil, and most of it travels on a long and winding road before it can be used in the States. American oil is produced, exported to refineries overseas, and refined oil then imported from other countries. The system is convoluted, but it works as long as there’s no major supply problem.
Five decades after the first oil embargo, the US remains very dependent on foreign sources for oil, gas, and diesel. And now, “There is the potential for a major supply chain disruption of our oil. If the Houthis, Iranians or any other player sinks a US oil tanker (or other vessel) the oil market will suddenly be propelled in a very different direction because insurance companies will certainly jack up prices dramatically and may not offer insurance at any price.”
A severe supply shortage would impact not just the US but other countries too, either directly or indirectly, as the effects are felt around the world and would impact consumers and manufacturers. Unfortunately, it appears that the pieces are in place so that a scenario of this kind could theoretically materialize. Although the US does have significant estimated reserves underground, its refineries would have to be retooled to comply with the very strict environmental regulations now in place, and that would not only be costly but also very time consuming.
“It would take a Presidential order suspending those environmental rules and allow American refineries to produce gasoline, jet fuel, diesel and other products industry and the economy need,” Poplar says.
So oil markets are quiet now and may remain so. At the same time, if you meet people in the oil industry and their nails are chewed up - you now know why.
Sources: bloomberg.com; reuters.com; state.gov; wikipedia.org; thoughtco.com. YouTube: Steve Poplar: Everything Points To A Crisis In Oil
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
