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Wednesday, November 26, 2014         

NEW YORK TIMES


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U.S. reliance on Saudi Oil is growing again

By Clifford Krauss

New York Times

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HOUSTON >> The United States is increasing its dependence on oil from Saudi Arabia, raising its imports from the kingdom by more than 20 percent this year, even as fears of military conflict in the tinderbox Persian Gulf region grow.

The increase in Saudi oil exports to the United States began slowly last summer and has picked up pace this year. Until then, the United States had decreased its dependence on foreign oil and from the Gulf in particular.

This reversal is driven in part by the battle over Iran’s nuclear program. The United States tightened sanctions that hampered Iran’s ability to sell crude, the lifeline of its troubled economy, and Saudi Arabia agreed to increase production to help guarantee that the price did not skyrocket. While prices have remained stable, and Iran’s treasury has been squeezed, the United States is left increasingly vulnerable to a region in turmoil.

The jump in Saudi oil production has been welcomed by Washington and European governments, but Saudi society faces its own challenges, with the recent deaths of senior members of the royal family and sectarian strife in the eastern part of the country, making the stability of Saudi energy and political policies uncertain.

The United States has had a decades-long political alliance with the Saudi leadership, one that has become even more pivotal during the turmoil of the Arab spring and rising hostilities with Iran over that nation’s nuclear program. 

The development underscores the U.S. difficulty in lowering its dependence on foreign oil — especially the heavy grades of crude that Saudi Arabia exports — even as domestic oil production is soaring. It is a development that has alarmed conservative and liberal foreign policy experts alike. 

“At a time when there is a rising chance of either a nuclear Iran or an Israeli strike on Iran’s nuclear facilities, we should be trying to reduce our reliance on oil going through the Strait of Hormuz and not increasing it,” said Michael Makovsky, a former Defense Department official who worked on Middle East issues in the George W. Bush administration.

Senior Iranian officials have repeatedly threatened to close the Strait of Hormuz, the narrow neck through which most Gulf oil is shipped, and the Iranian navy has held maneuvers to back up the threats. Most analysts say it is doubtful the Iranians would take such an extreme measure because that would block exports vital to the country’s economy, but the U.S. Navy has been preparing for such a contingency.

Many oil experts say that the increasing dependency is probably going to last only a couple of years, or until more Canadian and Gulf of Mexico production comes on line. 

“Until we have the ability to access more Canadian heavy oil through improved infrastructure, the vulnerability will remain,” said David L. Goldwyn, former State Department coordinator for international energy affairs in the Obama administration. “The potential for an obstruction of the Strait of Hormuz therefore poses a physical threat to U.S. supply as well as a potential price shock on a global level.” 

Obama administration officials said they were not overly worried for several reasons. In the event of a crisis, the United States could always dip into strategic petroleum reserves; domestic production continues to climb; and Gulf of Mexico refineries could be adjusted to use higher-quality, sweeter crude oil imported from other countries. 

“There are going to be tensions in the Middle East whether that oil is going to the United States or going to somewhere else,” said Adam Sieminski, administrator of the Energy Department’s Energy Information Administration. “And if oil prices go up because of a problem in the Middle East, that causes a problem for the world in general and not one that is specific to the United States.” 

In the United States, several oil refining companies have found it necessary to buy more crude from Saudi Arabia and Kuwait to make up for declining production from Mexico and Venezuela, insufficient pipeline connections between the U.S. and Canadian oil sands fields, and the fallout from the 2010 BP disaster, which led to a yearlong drilling moratorium in the Gulf of Mexico. 

“As refiners, we buy from wherever the supply is readily available and where we can get the best price,” said Bill Day, a spokesman for Valero Energy, the largest domestic refiner. 

The United States imported a daily average of more than 1.45 million barrels of Saudi crude over the first five months of this year, compared to a daily average of roughly 1.15 million barrels over the same period last year, according to Energy Department estimates. Similar increases have come from Kuwait and Iraq, even while total OPEC and non-OPEC imports declined. The United States has imported little Iranian oil in recent years. 

In recent years, U.S. oil imports have been trending lower, although total imports are little changed from the end of last year. But the big change came in imports from the Persian Gulf, spiking to 2.6 million barrels a day in May from 1.9 million barrels a day in December, now roughly 23 percent of total imports, compared with about 17 percent before. 

Domestic oil production has been surging the past three years and is up 10 percent this year. But most of the new production is coming from shale oil fields in North Dakota and Texas that produce high-quality sweet grades. Many of the refineries on the Gulf of Mexico coast are designed to refine the heavier oils that the United States has traditionally imported from Venezuela, Mexico and Canada. 

Mexican and Venezuelan production has been sliding the past few years, and much of that oil has been replaced by Canadian oil from oil sands. While Canadian production has been increasing rapidly in recent years, there is not enough pipeline capacity to get all that the Gulf of Mexico refineries want to buy to their facilities. 

There are also echoes from the disastrous BP Gulf of Mexico well explosion and spill in 2010, which led to a federal moratorium on Gulf drilling. Before the accident, Gulf oil production was 1.75 million barrels a day, and it was projected to increase to 2.2 million barrels a day by this year. 

Instead, because of the yearlong halt on new drilling, production is about 700,000 barrels a day lower than forecast. Much of that oil is heavy and is being replaced by Saudi imports, experts said, although Gulf of Mexico production is ramping up again. 

The boost in Saudi shipments also represents a swing for the kingdom, which had been shifting exports to China in the wake of the 2008 financial crisis and recession. 

“The U.S. market for sour crude is looking very good for Saudi Arabia this year while the Chinese market is looking pretty bad,” said Edward Morse, Citigroup global head of commodity research. 

He noted that demand for crude in China grew by less than 1 percent over the first half of the year. 

Saudi oil experts said the kingdom was merely following the markets. 

“This is strictly, totally business,” said Sadad Al Husseini, former head of exploration and production at Saudi Aramco, the state oil company. “Saudi production is flat out. Where you send it is a matter of where you make the best profit.”






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