Saudi oil export stability rests on Eastern markets |
Saudi Gazette - 26 August, 2012
THE trend has reversed - at least for the time being. The reversal is significant - in more than one ways. It has considerable political connotations. And is generating reverberations in Washington too.
For the last number of years, there has been apparently a determined bid in Washington to sway away - as much as possible - from the Middle Eastern and Saudi crude, for a host of reasons. Politics and strategic considerations were definitely behind it. Saudi Arabia, which once upon a time, in not too distant past, was the biggest provider of crude to the United States, was subsequently relegated to the fourth or fifth position. Times had indeed changed!
And in the meantime, Riyadh was almost forced to look for other markets - giving a fillip to its ’Look East’ Policy. Beijing ultimately replaced Washington as the major destination of Saudi crude.
However, things appear to be changing - for the time being. The United States imported a daily average of more than 1.45 million barrels of Saudi crude over the first five months of this year, compared to a daily average of roughly 1.15 million barrels over the same period last year, according to US Energy Department. The increase in Saudi oil exports to the United States began slowly only last summer and remained virtually unnoticed - until it picked up pace early this year.
Similar increments have come from Kuwait and Iraq too, as total Opec and non-Opec imports into the US declined. Imports from the Gulf countries spiked to 2.6 million barrels a day in May from 1.9 million barrels a day last December, accounting roughly for 23 percent of total US imports, compared with about 17 percent before.
US reliance on oil from Saudi Arabia and the overall Middle East is thus on the rise - again. And this is happening despite the surge of growing domestic production in North America. Domestic oil production within the US also has been surging over the last three years and is up 10 percent this year. But most of the new production is coming from shale oil fields in North Dakota and Texas, and is sweet, while a number of refineries are programmed to use heavier, sour version - matching the Saudi crude.
The development also underscores how difficult it is for the United States to lower its dependence on the heavy grades of crude that Saudi Arabia exports. In the meantime, Mexican and Venezuelan production, basically supplying heavy crude to the US, has also been somewhat, sliding over the last few years. And though, much of that oil has been replaced by Canadian oil from oil sands in recent years, yet there are physical limits to that. While Canadian production has been increasing rapidly in recent years, there is not enough pipeline capacity. And this continues to be a real bottleneck in the North American grid.
There are also echoes from the disastrous BP Gulf of Mexico well explosion and spill in 2010, which led to a federal moratorium on Gulf drilling. Before the accident, Gulf oil production was 1.75 million barrels a day, and it was projected to increase to 2.2 million barrels a day by this year. Instead, because of the yearlong halt on new drilling, the current production is about 700,000 barrels a day lower than forecast. Much of that oil is heavy and is now being replaced by Saudi imports, experts say.
Thus in the United States, several oil refining companies have found it necessary to buy more crude from Saudi Arabia and other Gulf Arab states to make up for the emerging deficit. "As refiners, we buy from wherever the supply is readily available and where we can get the best price," New York Times quoted Bill Day, a spokesman for Valero Energy, the largest domestic refiner in the US.
How long this trend of increasing Saudi exports to the US would continue?
Many oil experts say that the increasing dependency is probably going to last only a couple of years or until more Canadian and Gulf of Mexico production comes on line. "Until we have the ability to access more Canadian heavy oil through improved infrastructure, the vulnerability will remain," said David L. Goldwyn, former State Department coordinator for international energy affairs in the Obama administration. "The potential for an obstruction of the Strait of Hormuz therefore poses a physical threat to US supply as well as a potential price shock on a global level."
Obama administration officials said they were not overly worried for several reasons. In the event of a crisis, the United States could always dip into strategic petroleum reserves; domestic production continues to climb; and Gulf of Mexico refineries could be adjusted to use higher-quality, sweeter crude oil imported from other countries.
Many in the US though appear worried on the development - for strategic reasons. Raymond J. Learsy in a recent piece titled, "America’s Increased Reliance on Saudi Oil Manifests the Bankruptcy of Obama’s Energy Policies," is wary of the development - reflecting a mindset among some. "Ironically, much of our dependence on Saudi oil supply could be eliminated by the completion of the Keystone XL pipeline from Western Canada to the US Gulf. The President, seemingly responsive to strident environmentalist criticism to the sourcing of Athabasca tar sands oil, has withheld approval of the pipeline in spite of the fact that Canada is proceeding with the extraction project and will direct the output to other markets on the Pacific Rim if the US continues to demur. A clear example how this administration has it priorities upside down," he argued.
Criticizing the current Democratic Administration in the White House of not having a coherent policy to access the vast reservoirs of oil and gas offshore on federal lands and Alaska, he accuses White House of wasting hundreds of millions, if not billions, on failed alternative energy projects such as Solyndra and tax holidays for alternative energy sources such as windmills. "Alternative energy needs be a focus but not to the detriment of energy independence and rational energy pricing. Consider the enormous benefits that would have accrued to the economy and our national security, had even a portion of the funds and focus expended on alternative energy been allocated to developing environmentally safe fracking techniques giving us unfettered access to our vast holdings of shale gas and shale (tight) oil," he underlined.
He also blames the Obama Administration for having done "virtually nothing since inception to neither mitigate nor corral the wild trading of oil contracts on the exchanges." Quoting Rex Tillerson, Chairman and CEO of Exxon, he said speculation was adding $ 30 to $ 40 to the price of each barrel of oil.
A new, small, window has definitely entered Aramco’s armory. Yet, this window is there only for a limited period of time, one has to underline. Khalid Al-Falih, the current czar of Saudi crude, will have to continue looking East - for maintaining stability and continuity in Saudi crude exports.