Q&A of the Day – If the US Doesn’t Rely on Middle East Oil, Why Are We Paying More?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station page in the iHeart app.
Today’s entry: Hi Brian, Love the show, listen everyday, I appreciate how you give factual information on the topics you address. Could you please explain why our gas prices are going up when we use so little of the oil that comes from the Strait of Hormuz, which I believe is around 2%. Why is this impacting our prices so much? Thanks for all you do.
Bottom Line: Hey there, thanks so much for listening every day and for the kind words. You're spot on that the U.S. gets only a small slice of its oil directly from the Persian Gulf region via the Strait of Hormuz. The exact number preceding the war with Iran had been 2.7% of our total petroleum liquids consumption. Most of our imports are from Canada, Mexico, and domestic production, which is at record levels, keeps us as a net exporter of oil overall. But obviously with oil and gas prices having increased by about 33% over the past three weeks, since the start of this thing, the impact for what we pay in the states has been considerably more significant. The key is this...oil is a global commodity, priced on the world market in U.S. dollars (all commodities are US Dollar denominated).
What happens in the Strait of Hormuz doesn't just affect the tankers squeezing through the Strait, it ripples through the entire global supply chain and sets the benchmark for crude prices everywhere, including what U.S. refiners pay. Even if the U.S. isn't pulling much oil straight from the Gulf, global traders price in the risk of shortages from major exporters like Saudi Arabia, Iraq, UAE, Kuwait, and others who rely on that route.
With 20% of the world’s energy supply currently offline due to what’s essentially been a closed Strait of Hormuz, there’s increased demand for the available supply of oil that’s being produced driving up prices. But that doesn’t mean that we’re in the same boat as other countries that are more directly reliant on the Gulf.
The biggest impact on oil prices has come with what’s known as Brent crude – which is the blend of oil that’s primarily used in Europe, Africa, Asia and the Middle East. The price of Brent is approximately $32 higher since the start of the Iran war compared to an increase of about $25 with WTI crude that’s the primary north American oil blend. In other words, the market impact has been worse overseas than what we’ve seen.
The other notable impact is that while the Strait being closed has had a significant price impact, what we don’t risk is having a supply shortage. The United States is currently the largest producer of oil in the world, and while we do still import and export crude – we do meet the definition of being “energy independent”. Most recently Americans consumed about 21 million barrels of oil per day while we’re producing about 24 million barrels per day. This mitigates the potential impact of systemic supply risk – which is what the U.S. experienced during the energy crisis in the 1970’s - when the U.S. was heavily reliant on middle eastern energy.
The other benefit of U.S. energy independence, and serving as the world’s largest oil producer, is where the increased profits from the increased prices are going. While no one wants to pay more at the pump, given a choice between the increased profits going into the pockets of American companies or middle eastern companies, I’m sure most Americans this side of Dearborn, Michigan would prefer to keep the money in the U.S.
So yeah, even with our energy independence, we're not isolated from global events. When a critical artery like Hormuz gets squeezed, the world pays more at the pump no matter where the oil originates.
Thanks again for the support and keep the questions coming.