“Whoever controls oil, controls much more than oil.” John McCain
Is the US losing its ability to control oil?
Good morning, I’m Austerity Jones, and I am back with C Thomas Printer.
“I don’t think you are ever going to see a refinery built again in this country. It’s been 50 years since we built a new one. In a country where the policy environment is trying to reduce demand for these products, you are not going to find companies to put billions and billions of dollars into this.” Chevron CEO Michael WirthThe 150 year history of refining oil at the Philadelphia Energy Solutions refinery has come to an end as the refinery is being dismantled and converted to a green high-tech campus for ecommerce and life science companies. Isn’t that a nice story? Green, lovable, and totally dependent on energy, but we are killing the underlying foundation that make both e-commerce and life science companies feasible. The US is not thinking properly about its energy policy, and my biggest prediction for 2023 is that we see a sizable oil shock again. Last year’s $5 gas woke us up, but we have hit the snooze button.
Few people want to talk about the American reliance on oil. In 2018, despite being just a shade under 5% of the population, the US consumed 20% of the world’s oil supply, down from almost 30% three decades ago. We consume just about 20 million barrels a day and that has been growing slowly over the last 30 years, but the world’s consumption has grown 50% in the last 30 years. China alone has seen its usage of petroleum products rise 365%. It turns out when you shift 300 million people from farming to a suburban based manufacturing power that they use more energy, lots more. Unfortunately, they consume almost 13 million barrels a day and only produce about 5 million barrels a day making them a huge player on the world market as a buyer of oil. When we mentioned that Xi was in the Middle East and meeting with Saudi Arabia, it was to secure a long term contract to meet their energy needs. This is reminiscent of when the US and Saudi Arabia created the petrodollar system in the 70’s with Saudi Arabia, back when the US was the largest importer of oil. We have discussed the petrodollar here at CTPC and how important it is for American security interests and how important it is as the world’s reserve currency. The petroyuan is coming and it might not be a threat yet, but it will be an ever larger factor in the years ahead.
The 1970s are an especially interesting decade to note in that the petrodollar was born out of the 1973 and later 1979 oil crisis. The petrodollar is just the agreement for the Saudis to price their oil in dollars and knowing that the world needs oil that by proxy creates a need for dollars. As I mentioned we were the world’s largest importer of oil and Saudi Arabia was very prescient to make us an ally, but they did so after flexing their energy power. In 1973, OPEC led by Saudi Arabia created an oil embargo against the US, Canada, Japan, the Netherlands, and the UK in response to supporting Israel during the Yom Yippur War of 1973. In 6 months the price of oil went up 300%.
In 1979, the price of West Texas crude oil went up 250%. Due to the shortages, panic buying at the gas pumps were equivalent to what we saw for toilet paper during the Corona Virus scare in 2020. There were attempts to shorten the long lines of motorists waiting to fill up their cars with gas. There was odd-even rationing meaning if a car’s license plate ended in an odd number the driver was allowed to fill their tank on one day and if a car’s license plate ended with an even number the driver had to wait until the next day etc. People, afraid to run out, would sit and idle for hours waiting to fill up their gas guzzling vehicles. In 1976, the US domestic market purchased 9% of their cars from Japan but by 1980 that number was up to 21%. Gas mileage became king and fuel economy led to less usage of gasoline per car since the 1970s.
This 70’s show was the last time America opened a refinery and since we were largely in the import business at the time it made sense to design refineries for the heavier and less sweet oil. The heavy means it is difficult to refine or break down into its useful parts and the less sweet Arab oil means it has more sulphur content. This is what most US refineries can handle en masse, but in the last 50 years America has become more self sufficient with regard to drilling their own oil but it is light and sweet. So we are dependent on imports to meet our diesel and other needs. When we went spoiled child on Russia and seized their foreign reserves and kicked them out of the Swift system, this led to US going to Iran and Venezuela (lynchpins of freedoms) and said we were sorry for putting sanctions on them. We decided that the better way would be to buy refined oil products that suited our needs from India, oil that came from Russia. That’s right, per the Telegraph India, the US has been a large buyer of a virgin gas oil (VGO) 200,000bpd run by Reliance Energy and Nayara Energy who refineries are using Russian sourced oil. You didn’t think America would have to sacrifice by actually paying higher prices for longer, no no no. We drained half of our strategic petroleum reserve, and then outsourced our need for Russian oil to India. We have turned India into the second largest buyer of Russian Crude after China and they do so at a discount. Now India who didn’t go along with our sanctions has a booming oil export business and Europe who backed the Americans’ play are trying to survive the warm winter without a catastrophe and dealing with sky high energy prices when they were getting their energy needs in a pipeline from Russia one year ago? So, in addition to a refinery issue, we have a geopolitical threat amongst our allies with regards to energy. Add this clear go around to the Inflation Reduction Act that infuriated Europe because they believed it was diverting investment capital to the US from Europe and the biggest ally America has now has another reason to be wary of American interference.
President Nixon tried oil price ceilings through executive orders. US President Jimmy Carter, the Joe Biden of his time, said he would impose windfall profit taxes on oil companies and he did according to the Congressional Research Service, the tax reduced oil consumption by 3-6%, increased foreign oil imports by 8-16%. Let’s hope that they don’t try again, but Biden is blustery. He threaten to put the oil majors out of business on the campaign trail and so Chevron and Exxon both reported earnings this week and had monster profit numbers. Exxon which is on a large buyback program and dividend paying schedule watched as Chevron announced a $75 billion stock buyback. Neither CEO seemed to care about what Biden had to say. Ever curious, Guy Adami on Fast Money said he was waiting for the phone call to Meta from Joe Biden after the company formerly known as Facebook announced a $40 billion buyback. I guess posting a picture of your vacation is more important than the jet fuel or gasoline that took you there.
“Whoever controls oil, controls much more than oil.” John McCain Sincerely Yours,
C Thomas Printer
This week’s financial tip
Do your taxes as soon as possible. You should have gotten your W2G by now and if you are expecting a refund you should get your taxes done and get that money earning some interest like we talked last week in a bond or perhaps a savings account or even better, paying off a credit card if you still have a balance.
On this date in history
80 years ago to be exact, Jake LaMotta defeated the previously undefeated Sugar Ray Robinson who had a record of 40-0. Robinson would go on to win his next 91 fights.
Born on this date
Both quarterbacks and former teammates from Super Bowl XII, Craig Morton from Denver and Roger Staubauch for Dallas. Our favorite Roger Staubach would go on to win that Super Bowl 27-10.
Resources
US oil usage vs the rest of the world
Philly refinery to close after 150 years
The US is buying Indian oil that originated in Russia
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