We are living in a world where sanctions against Iran have limited the volume of crude production from a major oil producing country and where, recently, Iran attacked two oil facilities in Saudi Arabia. However, there hasn’t been a significant increase in oil prices globally as the result.
This is in contrast to 2012 when oil prices shot up as high as $120 per barrel when initial U.S. sanctions against Iran were applied.
Jamie Webster, the senior director for Boston Consulting Group and fellow at Columbia University Center on Energy Impact, said during the U.S. Energy Information Agency’s (EIA) International Energy Outlook 2019 discussion on Sept. 24 that the latest lack of volatility can be attributed to how much more global the oil trade has become.
“Obviously part of this is driven by the U.S. but it’s also driven by the Middle East, which makes up about 25% of it,” Webster said during the trade discussion of the three-hour panel held at the headquarters of the Center of Strategic and International Studies in Washington, D.C. The event was webcast as well.
“Russia and Russian exports are another part of it. Even China, of course, has been exporting more and more petroleum product,” Webster said. “So, this move toward trade is an interesting one to watch in that the oil market, which has always been a globalized market, is actually becoming more globalized. We’re having more and more movement of oil around the world.”
But while the acceleration of trade has grown, Webster said growth has been skewed by products. He pointed out that in 2000 about 60% of oil and oil products crossed the border and now it's 72%, which is a strong indicator “we are becoming more and more globalized.”
Now, countries have even more of an ability to decide not only what they are going to do, but also the ability to levy sanctions that can impact a country, but those sanctions will less and less of an impact on the global market.
“This is different than in 2012 when we were a slightly tighter market when we implemented the sanctions on Iran and prices went as high as $120,” Webster said. “So that flexibility is certainly there.”
Another shift that Webster called attention to is that there is not only a change between export growth and product export growth, but also much faster growth in product exports.
While export products are still around 10 million barrels per day (MMbbl/d) less than it is for crude exports, Webster said if that number keeps going in that direction in 10 years they will likely pull even with one another.
“It used to be that you take the crude oil from the producing area, whether that was the U.S. or the Middle East or Russia, and you would transfer it to the local area where they would refine it into the products that they needed,” he said. “Instead, what you are seeing is they are bringing the refineries back to home. You first saw this with the business model at the refineries in India where they would bring crude from other places and then export that product around the world. They recognized if they had a big enough refinery they could actually make that work.”
That has also meant a big boom in product exports from the U.S., which could put pressure on nations in Asia to try to keep pace.
“Certainly, we have grown a lot in crude exports since the policies changed,” Webster said. “But our product exports are also booming, you are also seeing a big boom in products exports out of China and the Middle East.
“So what this is means for countries that previously wanted to build up refineries for energy security reasons as well as for economic reasons there is likely to be an overbuild in refinery capacity, particularly in Asia.”
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