US 'oil weapon' could change geopolitics forever

The United States became the world’s top oil producer in February, and now it may use its leverage to reinforce its position as a geopolitical force.

In a dynamic that shows just how far US oil production has come in recent years, the US Energy Information Administration (EIA) said on Monday that in the last two months of 2018, the US Gulf Coast exported more crude oil than it imported.

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Monthly net trade of crude oil in the Gulf Coast region (the difference between gross exports and gross imports) fell from a high in early 2007 of 6.6 million barrels per day (bpd) of net imports to 0.4 million bpd of net exports in December 2018. As gross exports of crude oil from the Gulf Coast hit a record 2.3 million bpd, gross imports of crude oil to the Gulf Coast in December—at slightly less than 2.0 million bpd—were the lowest level since March 1986.

US oil production hit a staggering 12.1 million bpd in February, while that amount has been projected to stay around that production mark in the mid-term then increase in the coming years. The US is the new global oil production leader, followed by Russia and Saudi Arabia, while Saudi Arabia is still the world’s largest oil exporter - a factor that still gives Riyadh considerable leverage, particularly as it works with Russia, and other partners as part of the so-called OPEC+ group of producers. However, Saudi Arabia's decades-long role of market swing producers has now been replaced by this coalition of producers, reducing Riyadh’s power both geopolitically and in global oil markets. In short, what Saudi Arabia could once do on its own, it has to do with several partners.

Meanwhile, US crude oil production, particularly in the Gulf Coast region, is still increasing. In November 2018, US Gulf Coast crude oil production set a new record of 7.7 million bpd, the IEA report added. However, since most of the oil produced in the US is light sweet crude, the US still has to rely on heavier crude blends from Saudi Arabia, Venezuela and others since most American refineries are configured to process heavy crude. On the other hand, a surplus of light sweet crude allows the US to export more oil thus giving the country growing energy geopolitical power once enjoyed almost exclusively by Saudi Arabia and Russia. The increasing amount of US crude being exporter, along with the increasing amount of US LNG being imported (with exports of both fuels projected to increase) is changing energy geopolitics.

US oil weapon possibilities

Evidence of growing American energy clout was evident last week when Secretary of State Mike Pompeo urged the oil industry  to work with the Trump administration to promote US foreign policy interests, especially in Asia and in Europe, and to punish what he called “bad actors” on the world stage. Pompeo made his remarks at IHS Markit’s CERAWeek conference in Houston, where US oil and gas executives, energy players and OPEC officials usually gather annually to discuss global energy development. Pompeo's added that America’s new-found shale oil and natural gas abundance would “strengthen our hand in foreign policy.” He added that the US oil-and-gas export boom had given the US the ability to meet energy demand once satisfied by its geopolitical rivals.

This is the first time, in at least recent history, that American officials have considered using oil production and exports for geopolitical advantage. One of the last times the country had such oil production clout dates back to the years just before World War II when the US held back oil exports to Japan. Consequently, this was one of the mitigating factors that provoked Japan to attack Pearl Harbor in 1941. Moreover, Pompeo's comments can be viewed as a reversal from the so-called oil weapon that Arab producers have used on the US and its western allies for decades, including both the unsuccessful 1967 Arab oil embargo and the 1973 Arab oil embargo that brought the US and its allies to their knees, driving up the price of oil four-fold and contributing to severe economic headwinds for the West and a geopolitical and economic shift that still persists to the current.

This article was originally published on Oilprice.com