he United States is the world's largest oil producer, pumping some 13 million barrels every day. Yet the U.S. is also the biggest consumer of crude, a major exporter, and a country with an empty strategic petroleum reserve. Continental Resources founder Harold Hamm called the U.S. "unusually vulnerable" to an oil shock.
Just a month ago, such a shock looked rather unlikely. The war in the Middle East had been going on for a year now, and oil supply had not been disturbed. It all changed this week after Iran carried out a barrage of precision missile strikes against Israel, Israel said it would retaliate, and Iran said it would respond to that retaliation.
In a matter of hours, oil supply from the Middle East stopped being secure. A day later, it became even less secure, after President Biden told media the White House was discussing attacks on Iranian oil facilities with Israel. While not specific—the literal remark Biden made was "We're discussing that. I think that would be a little... anyway"—the very mention of such a discussion sent oil prices higher. This is not a good time for higher oil prices in the U.S.
"They have drained the SPR, and refinery inventories are at their lowest in America [in years]. And you just never know when you need it. It's kind of like having gas in your car," Continental Resources' founder and executive chairman Harold Hamm told the Financial Times this week.
"We are in an unusually vulnerable position?.?.?.?everybody is looking in the direction [of the Middle East] right now — and has been for the last four years — but we had a president that frankly wasn't at home," Hamm added.
Hamm is not known for mincing his words, and the comments he made to the FT are in character. They may be a bit harsh, but it is a fact that the strategic petroleum reserve of the United States has been sitting at a 40-year low after the Biden administration released a massive amount of oil to the market back in 2022 with the purpose of taming the oil price surge that followed Russian troops' entry into the Ukraine in February 2022.
Since then, however, the federal government has been slow to refill the reserve, mostly because of too high prices. Some have even argued the U.S. does not need such a strategic reserve any longer, what with it being the world's largest producer. What these commenters seem to forget is that, first, oil is traded globally, and second, the U.S. may be the biggest producer of oil, but it is also the biggest consumer, and it consumes about 7 million barrels daily more than it produces. And that makes it vulnerable to global price swings.
Of course, a crisis is not necessarily imminent. Yet the very suggestion that Middle Eastern oil flows may get disrupted is enough to create tension in an economy that only recently recovered to an extent that finally convinced its central bank interest rates could go down a bit. The U.S. is still fragile economically—not to mention higher oil prices a month before the election could be a killer for the incumbent party.
For now, the reaction of oil markets to the latest events in the Middle East has been relatively calm. CNN's Matt Egan said it "reflects a boy-who-cried-wolf mindset that has set in." Indeed, since last year, traders seem to have discounted the possibility of an oil crunch because whatever happened in the Middle East, Iran stayed quiet. Yet this just changed this week.
"This is going to get worse before it gets better. The story of the village boy who cried wolf did not end well — for the village or the boy," Rapidan Energy Group's Bob McNally told CNN's Egan. In the case of the U.S. "village", Continental's Hamm saw the Biden administration's squeeze on oil and gas as bad policies, calling it "short-sighted" and slamming the admin for compromising energy security during challenging geopolitical times.
The FT quoted one unnamed Biden admin official as countering the criticism with a declaration that the current federal government had actually boosted U.S. energy security by doubling down on the energy transition and buying oil for the SPR.
"People said this would break the market, but it didn't. People then said we would have $100 oil this year, but we haven't. People said we wouldn't be able to fill up the SPR. But we are filling the SPR. We put a plan together in January of 2022 and we have stuck to it without deviation, despite all the dire predictions," the official said.
Currently, there are about 19 days' worth of emergency oil supply in the SPR. That should be enough if prices spike for a short while. As for $100 oil, that might yet happen unless someone defuses the Middle Eastern geopolitical bomb. These are interesting times and they seem to be interesting even for the biggest oil producer in the world.
By Irina Slav for Oilprice.com
