Why energy security is better than energy independence
The Venezuelan crisis reveals two important facts about global energy markets: the world has plenty of oil, and the U.S. will always need to import some of it.
With 297 billion barrels of proven reserves, Venezuela has more oil than any other nation, including Saudi Arabia. The South American country could supply the United States for the next 40 years if it was not such a political basket case.
President Donald Trump last week refused to recognize a sham election staged by Nicolas Maduro. Instead, he recognized the leader of the National Assembly, Juan Guaidó, as the interim president until Venezuela can hold a proper election.
Trump also implemented a plan to deny Maduro the money his nation raises by selling 1.1 million barrels of oil a day, a move that could radically reduce Venezuelan exports. Historically, global markets have reacted badly to this kind of geopolitical drama, but so far, they have barely blinked, with international benchmark Brent
crude hovering at $62 a barrel.
Gone are the days when a hiccup in an OPEC member nation could easily add $10 to the price of oil. The number of suppliers has become so diverse, and they’ve built so much excess capacity, that global markets feel secure.
Such a diversity of suppliers is especially crucial for the U.S., which is not only one of Venezuela’s biggest customers, but also a valuable customer. The oil business is far more complicated than most realize.
In the world of crude oil, there are dozens of different types, which are graded on their thickness and sulfur content. Texas’ Permian Basin produces light, sweet crude. Venezuela’s oil is thick and sour, which is far more common in the Western Hemisphere and generally cheaper.
Most U.S. coastal refineries are designed to use a blend of light and heavy crudes, which guarantees they can shop the global market and maximize economic efficiency. Once a refinery is built and tuned, it can cost tens of millions of dollars to optimize it for a different blend.
Refiners also do not want to get locked into buying from a single supplier. A refinery’s location is also a factor since importing oil from the Middle East is often cheaper for a New England refinery than moving domestic crude up from Texas.
By keeping their options open, refiners guarantee energy security, if not energy independence. In 2018, the U.S. imported an average of 2.8 million barrels a day of medium or heavy crude from foreign suppliers, according to analysts at Morningstar Commodities Research. More than 500,000 barrels a day came from Venezuela, according to the U.S. Energy Information Administration.
Venezuela, meanwhile, imported about 105,000 barrels a day from the U.S., because its crude is so thick that the national oil company PDVSA must thin it with light crude and other byproducts to load it onto tankers. Lately, PDVSA has relied on West Texas oil.
U.S. refiners must still blend the Venezuelan crude before making gasoline, jet fuel and diesel. The biggest importer for the U.S. market is Citgo, which PDVSA bought in 1990. The U.S. has historically relied on Venezuela for about 5 percent of its daily crude supply, though that number has dropped with Maduro’s mismanagement of PDVSA.
Luckily, refiners have plenty of alternatives to heavy Venezuelan crude.
Offshore producers in the Gulf of Mexico, some operating just outside Venezuelan-controlled waters, are thrilled to see prices rise for their medium sour oil, a grade known as Mars. Exxon Mobil, Shell and Chevron are helping replace the lost Venezuelan barrels at only a slightly higher price.
Canadian oil sands operators produce a very heavy crude that has suffered horribly since oil prices dropped in 2014 and provincial officials ordered a cut in production to boost prices. Now the Canadians are gearing up to deliver heavy crude to the Gulf Coast using railroad cars since the Keystone XL pipeline is still caught up in litigation and state regulatory hearings.
Saudi Arabia, which also cut production to boost prices, also sells a heavy crude. If prices begin to creep too high and endanger the global economy, Crown Prince Mohammed bin Salman can easily replace the lost Venezuelan barrels.
The Venezuelan crisis demonstrates the wisdom of seeking energy security, not energy independence. Rather than relying solely on North American crude, the United States has wisely ensured that there are plenty of different places to buy different types of oil to meet our needs.
The oil market is another example of the benefits of globalization, and how it makes us more secure.