Lethal Trajectories - Michael Conley [88]
Chart A illustrates the supply and demand curves from 2012–2017 and impacts of shortages on the affordability of oil.
Chart A
Supply, Demand, and Pricing History
Impacts of Saudi Oil Crisis:
The global economy has been in a semipermanent state of recession since 2013 and is over 12 MB/D short of meeting current nominal demand. The abrupt loss of Saudi oil—and any other collateral reductions Mustafa can wrangle out of OPEC producers—will decrease supply to catastrophically low levels. Chart B illustrates the macro production numbers in 2009 and 2017 as a way of gauging the growing impact of Saudi oil on the global oil markets.
Chart B
Growing Impact of Saudi Oil
The Saudis possess about 25% of the world’s easily accessible proven reserves. If this oil were withheld indefinitely from world markets, oil prices could at least double—provided anyone could afford to buy oil in the range of $500 per barrel. At this price, Americans would pay over $14 per gallon at the pump. Further, it is anticipated that several OPEC members will make at least token supply cuts in a show of solidarity with Mustafa. Kuwait, Qatar, and the United Arab Emirates (UAE) are particularly vulnerable to Saudi coercion. The crisis will worsen if other OPEC producers make even minimal incremental cuts in production.
Sustainability and Risk Factors:
All oil-importing nations are at immediate risk from the Saudi oil embargo, as there are no alternative oil markets. A nation’s ability to respond to the embargo will depend on three things: 1) Oil inventories currently in their infrastructures, 2) Strategic Petroleum Reserves (SPR) available for tapping, and 3) Consumption patterns and ability to conserve and/or ration oil. A nation-by-nation analysis is underway but not available at this time. This report will focus on the United States and China, which collectively consume about 40% of the world’s oil.
The economic impact of Saudi oil restrictions will be felt immediately by poorer nations lacking oil or SPRs and then quickly spread to all other oil-importing nations. Global trading will slow to a trickle as huge de facto tariffs, in the form of sizeable transportation costs to ship goods, take hold. Domestically, the transportation and travel sectors and related industries will suffer first. The cost of farm products will skyrocket as fossil-fuel derivative products such as pesticides, herbicides, and fertilizers increase in price along with fuel costs.
The United States:
The United States now imports about 13 MB/D of the 17 MB/D of oil it uses daily. With the exception of the Bakken Oil Field, producing about one million barrels of oil per day, and Gulf deepwater drilling, there is limited domestic production in the lower 48 states. Coal and natural gas liquefaction efforts could be ramped up to increase domestic production of gasoline, but with some damaging environmental side effects. Corn-based ethanol production was curtailed in response to its detrimental impact on food pricing. Gulf oil production lagged after the Deepwater Horizon oil spill and moratorium in 2010, and Alaskan oil production is now insignificant. America’s consumer-based economy will feel an immediate pinch as discretionary consumer dollars are redirected into energy and food costs. America’s alternative and/or renewable fuel systems are not sufficient to replace oil-based energy lost from the embargo.
China:
Domestic oil consumption in China now stands at about 14 MB/D of oil, of which 12 MB/D is imported. Despite successes in locking up oil leases and guaranteed oil supply contracts throughout the globe, China has a growing oil need to support. In 2010, China surpassed America as the largest total user of energy from all sources, and it also became the