Thanks for an excellent post. I'm a Brit and I wondered if you can answer a question. I understand that the US is self sufficient in oil and gas. At least the US is a net exporter. SO you must have more than you need. So why have us Gasoline prices risen so much? You have your own refineries after all. I realise that the US has to be aware that disruption in the world oil market has a lot of implications globally but it seemed to me that in theory the US could continue it's action in Iran without worrying too much about energy prices at home. Obviously it does have an effect so I wondered why.
By the way I've been reading a book about the second world war and came across a new word for me, Autarky.
Good question. If the United States is a net-exporter of hydrocarbons (oil, natural gas), then should it not be insulated from the effects of “closing the Strait of Hormuz”? But, since the Chinese get much (most?) of their oil from the Persian Gulf, should they not be most affected by a closure of the Strait?
Answering both questions affirmatively “Yes” would seem to make sense… but then why have prices for petrol in the United States risen about $1 per gallon?
A glib answer would be that markets for oil and gas have become globalized and we can therefore speak of something approaching the global price of oil. If global supply goes down, because traffic through the Strait of Hormuz stops, then global price goes up. Even American buyers will be affected.
Oil markets have been globalized since at least 1948, but that’s because people have invested enormous resources in developing the logistics of oil delivery. All those oil tankers—they are engineering wonders!—and all those export facilities; all that stuff allows buyers to scan the world looking for the best delivered-cost of oil. And so, it could make sense for buyers situated in Japan to source some oil from Alaska (an American source), and buyers in California might do better by sourcing there oil from North Dakota rather than Alaska.
Buyers on the East Coast of the United States might find it advantageous to source some oil from Ghana or Nigeria rather than from producers in the Gulf of Mexico.
In any case, the fact that everyone is sensitive to global prices helps explain the fact that both the United States and Iran perceive tradeoffs to “closing” the Strait of Hormuz. Closing the Strait denies Iran oil revenues … but it raises global prices. The US perceives advantages to keeping the Strait open, because it keeps prices lower … in the United States! And lower petrol prices are perceived to influence electoral politics. With “midterm elections” coming up, the Trump Administration is very sensitive to rising petrol prices.
A few years ago I posted an essay about logistics and globalized markets:
In that essay, I observed that the globalized markets are globalized until things like World War disrupt free navigation on the seas. In the Second World War, the Germans anticipated being cut off from oil supplies. That’s why they had invested in producing oil from a very expensive source: liquefied coal. Liquefied coal would amount to a source of last resort. The allies ended up bombing their coal liquefication facilities.
Thanks for that Dean. I thought it was something like that. We have had a similar thing with regard to north sea gas. Many people are saying that we should start expand drilling in the north sea in order to improve energy security . Our wonderful energy minister says it wouldn't make any difference because it's sold on a global market which means that it just gets sold to the highest bidder anywhere in the world. That's not really true because all gas from our sector in the north sea comes into ports around our coast and then goes into the gas grid in the UK. It's bought and sold through our own market called the National Balancing Point which is administered by our own National Grid. I think it's more complicated because we also buy quite a lot of LNG from the US which I think is sold on a global market. Although people are complaining about the high price of gas it's not that high. Nowhere near the peaks at the start of the Ukraine war.
Also related is the price of electricity in Norway. In principle Norwegian electricity should be quite cheap because of all their Hydro Electric stations. Unfortunately they are members of the EU energy trading scheme even though they are not in the EU. This actually puts up the price of electricity for Norwegians. I believe some parties in Norway are campaigning to come out of that scheme.
That bit about North Sea gas going into a "global" market was the cleverest thing I've ever heard Ed Miliband say!
It surprises me that gas markets can be semi-globalized at all, for processing LNG must make for a much more ambitious and costly affair than shipping crude oil or distillates.
I find it very sinister. Everyone, including the head of the British wind farm association and other renewable energy company CEOs have urged him to get drilling again in the North Sea. And he comes out with the same thing every time. He can't be that stupid and he's the energy minister for goodness sake. The conclusion must be that he is actually trying to raise electricity prices even more and further tank the economy. I think he's the secret leader of "Just Stop Oil".
I'm pretty sure you are busy so I'll shut up for a while.
Thanks for an excellent post. I'm a Brit and I wondered if you can answer a question. I understand that the US is self sufficient in oil and gas. At least the US is a net exporter. SO you must have more than you need. So why have us Gasoline prices risen so much? You have your own refineries after all. I realise that the US has to be aware that disruption in the world oil market has a lot of implications globally but it seemed to me that in theory the US could continue it's action in Iran without worrying too much about energy prices at home. Obviously it does have an effect so I wondered why.
By the way I've been reading a book about the second world war and came across a new word for me, Autarky.
Greetings, Steve!
Good question. If the United States is a net-exporter of hydrocarbons (oil, natural gas), then should it not be insulated from the effects of “closing the Strait of Hormuz”? But, since the Chinese get much (most?) of their oil from the Persian Gulf, should they not be most affected by a closure of the Strait?
Answering both questions affirmatively “Yes” would seem to make sense… but then why have prices for petrol in the United States risen about $1 per gallon?
A glib answer would be that markets for oil and gas have become globalized and we can therefore speak of something approaching the global price of oil. If global supply goes down, because traffic through the Strait of Hormuz stops, then global price goes up. Even American buyers will be affected.
Oil markets have been globalized since at least 1948, but that’s because people have invested enormous resources in developing the logistics of oil delivery. All those oil tankers—they are engineering wonders!—and all those export facilities; all that stuff allows buyers to scan the world looking for the best delivered-cost of oil. And so, it could make sense for buyers situated in Japan to source some oil from Alaska (an American source), and buyers in California might do better by sourcing there oil from North Dakota rather than Alaska.
Buyers on the East Coast of the United States might find it advantageous to source some oil from Ghana or Nigeria rather than from producers in the Gulf of Mexico.
In any case, the fact that everyone is sensitive to global prices helps explain the fact that both the United States and Iran perceive tradeoffs to “closing” the Strait of Hormuz. Closing the Strait denies Iran oil revenues … but it raises global prices. The US perceives advantages to keeping the Strait open, because it keeps prices lower … in the United States! And lower petrol prices are perceived to influence electoral politics. With “midterm elections” coming up, the Trump Administration is very sensitive to rising petrol prices.
A few years ago I posted an essay about logistics and globalized markets:
https://dvwilliamson.substack.com/p/whos-afraid-of-oil-and-wheat-prices
In that essay, I observed that the globalized markets are globalized until things like World War disrupt free navigation on the seas. In the Second World War, the Germans anticipated being cut off from oil supplies. That’s why they had invested in producing oil from a very expensive source: liquefied coal. Liquefied coal would amount to a source of last resort. The allies ended up bombing their coal liquefication facilities.
Thanks for that Dean. I thought it was something like that. We have had a similar thing with regard to north sea gas. Many people are saying that we should start expand drilling in the north sea in order to improve energy security . Our wonderful energy minister says it wouldn't make any difference because it's sold on a global market which means that it just gets sold to the highest bidder anywhere in the world. That's not really true because all gas from our sector in the north sea comes into ports around our coast and then goes into the gas grid in the UK. It's bought and sold through our own market called the National Balancing Point which is administered by our own National Grid. I think it's more complicated because we also buy quite a lot of LNG from the US which I think is sold on a global market. Although people are complaining about the high price of gas it's not that high. Nowhere near the peaks at the start of the Ukraine war.
Also related is the price of electricity in Norway. In principle Norwegian electricity should be quite cheap because of all their Hydro Electric stations. Unfortunately they are members of the EU energy trading scheme even though they are not in the EU. This actually puts up the price of electricity for Norwegians. I believe some parties in Norway are campaigning to come out of that scheme.
That bit about North Sea gas going into a "global" market was the cleverest thing I've ever heard Ed Miliband say!
It surprises me that gas markets can be semi-globalized at all, for processing LNG must make for a much more ambitious and costly affair than shipping crude oil or distillates.
I find it very sinister. Everyone, including the head of the British wind farm association and other renewable energy company CEOs have urged him to get drilling again in the North Sea. And he comes out with the same thing every time. He can't be that stupid and he's the energy minister for goodness sake. The conclusion must be that he is actually trying to raise electricity prices even more and further tank the economy. I think he's the secret leader of "Just Stop Oil".
I'm pretty sure you are busy so I'll shut up for a while.
Thanks again
Steve
Governments have been going after the Gases of Life, CO2 and N2!
Bless all of y’all in agriculture for putting up with so much regulation and taxes. May this evil phase pass. Sooner rather than later.
I find the term decarbonising ironic since all life on earth is carbon based.