Oil, the US and the GCC
(Gulf Research Centre) March 19, 2013
The surge in liquids production in North America, and especially the United States, is now in the spotlight. According to the Petroleum Intelligence Weekly, in February 2013 US oil production increased by 855,000 barrels per day over the previous month, and Canada's by 347,000 b/d, for a total of 1.1 million b/d. In the same one-month lapse of time, production in the Middle East declined by 939,000 b/d, due to large reductions in Iran and Saudi Arabia, while Iraq's production increased by 474,000 b/d and the UAE's by 117,000. Such major monthly shifts should not be projected into the future, but they sure tell us that something is happening.
It is now unanimously expected that over the next 10 to 15 years North America might turn from being a net importer of crude oil into being a small net exporter. The change will be brought about by continuing increases in production in both Canada and the United States, while Mexico is still expected to decline - but this may well change.
Much has been made of the potential geopolitical consequences of this shift, notably with respect to US engagement in the Middle East arena. Against the backdrop of such rapidly changing production numbers, we should refrain from drawing hasty conclusions, both with respect to shifts in future crude oil flows and their geopolitical impact.
It should, first of all, be noted that the perspective of "oil independence" is valid for North America as a whole, not for the United States in isolation. In other words, it is a perspective that assumes that Canadian oil and gas will continue to be exported exclusively to the United States, and basically be equivalent to domestic US production. It is, however, very dubious that this might be the best solution for Canadian producers.
Even if the Keystone X pipeline receives a green light from Washington, a price differential is likely to persist between the US benchmark crude WTI and Brent; and between the Canadian benchmark Western Canadian Select (WCS) and WTI. If Brent is the reference price for sea-born crude oil traded internationally, WTI is the price that crude oil fetches in the US Midwest, and it has been at a discount of more than $20 relative to Brent. Analysts expect the building of the Keystone X pipeline to close this gap and reduce or eliminate the discount, but some prominent experts - notably Ed Morse - disagree and expect the discount to persist on the strength of rapidly increasing production. In turn, because of limitations in transportation logistics WCS had been trading at a discount of up to $40 to WTI: which means that while a barrel of oil ready to be loaded on a ship may fetch $110, a Canadian producer may receive only $50 for the same barrel. The situa tion is possibly even worse for natural gas.
The cause of this state of affairs is resistance to the building of pipelines from the oil-producing region in Canada and the Pacific or Atlantic coast: but this resistance will be overcome if such large discounts persist. Canadian gas and oil exports from the Pacific coast to the Far East would earn much more interesting prices than sales to the United States.
Thus, North America may well become a net exporter, but this does not mean that the United States will stop importing crude oil from other parts of the world. All the more so since crude oil is not imported by the Federal Government, but by individual refiners. Some refining capacity is in fact owned by national oil companies of the oil-producing countries, this being notably the case of PDVSA (Venezuela) and Saudi Aramco, the latter through its participation in the Motiva joint venture with Shell. Thus it is up to the producers to decide whether they wish to export to the United States, and not to the US to decide to import from them - unless the rules of the game are radically altered, which is very unlikely to happen.
In fact, it is more likely that US refiners will increase exports of refined products (of which the country already is a significant net exporter), notably towards the Far East, while continuing to import crude from some exporters outside North America. This also has to do with the quality of the oil: the surging US shale oil production is mostly light and sweet, and neatly substitutes for similar quality oil from West or North Africa; but Venezuelan and Saudi crude oil is heavier and contains more sulfur: refineries possessing the expensive installations needed to treat such more difficult crude oil will continue to do so in order to maximize the benefit of their investment.
But even in the very unlikely event that US oil imports from the Middle East were to cease altogether, there is little reason to expect that the United States will retreat from the area. The significance of oil from the Gulf is global, and the United States is a global power: it is very unlikely to grow indifferent to the independence and security of the GCC member countries simply because it no longer needs that oil in particular. After all, US involvement with Gulf oil began at a time when the US was a net oil exporter.
Unlike the United Kingdom, which was forced at some point in time to deliberately withdraw from East of Suez because of economic realities, the United States will continue to project its power globally, and the revival in US hydrocarbon production underpins the perspective of a renaissance of US industry and improving trade balance.
Much will depend on how important security concerns continue to be in the region, relative to other dimensions of international relations. There is little doubt that interdependence between the GCC and other major Asian countries (notably China, India, and South Korea) will grow more intense, not just with respect to trade in hydrocarbons and other merchandise, but also in cross investment, movement of people, and technological and scientific cooperation. Such multidimensional interdependence will have an impact on the functioning of the crude oil markets, and may lead to a degree of regional segmentation, whereby the oil market will be less global and resemble more closely today's gas market, rather than the other way around. But the GCC's Asian partners are not keen to compete with the United States in providing security against regional enemies: their mantra is rather strict adherence to the principle of non-interference in other countries' domestic affair s.
In the end, whether the US remains relevant for the region depends not so much on whether oil will continue to flow from the Gulf to the US, but on whether the region will be able to shape a more stable and peaceful order for itself.
Prof. Giacomo Luciani is a Senior Consultant to the GRC Foundation in Geneva.