The recent conflict with Iran and its proxies in Iraq has served as a reminder of the enduring potential for geopolitical risk to unsettle petroleum markets – not just globally but also in the U.S. While the U.S. has become significantly more energy-secure over the last decade, as a result of increasing domestic production of both crude oil and biofuels, we are not yet independent when it comes to petroleum, despite the claims of oil industry representatives and some political leaders. Just within the last week, the head of the American Petroleum Institute gave a speech on the state of American energy in which he asserted, “Reducing our nation’s dependence on foreign energy was the stated goal of every one of our last seven Presidents. ... Now, finally, the United States has achieved this bipartisan goal.” In recent days, politicians also have claimed that we no longer need oil from the Middle East. This is not the case. According to the latest statistics, the U.S. was on a trajectory to import 2.5 billion barrels of crude oil in 2019, nearly a quarter of which originated from OPEC. In fact, half of the top ten origins for crude oil are OPEC members; Saudi Arabia and Iraq are the third- and fourth-largest sources, and the U.S. was on track to send them $12.3 billion and $7.8 billion, respectively. The latest Short-Term Energy Outlook from the U.S. Energy Information Administration reports that the U.S. is forecast to have produced 4.5 billion barrels of oil in 2019, and refineries are forecast to have used 6.1 billion barrels of oil. This means imports accounted for 36% of supply and 41% of refinery usage.
So, why do we still import substantial quantities of crude oil? Refinery configuration and geography. The shale oil that the U.S. has increasingly produced is light, while refineries are typically configured to process heavier crudes. Additionally, much of the shale production takes place in the midcontinent. Notably, California, the largest gasoline-consuming state, has been importing increasing quantities of crude oil, more than two-thirds of which comes from OPEC. Then why are there claims of energy independence? In the petroleum market as in business, the difference between “gross” and “net” is critical. Since the government lifted restrictions in late 2015, oil exports have grown steadily. As a result, net imports have declined. The oil industry points to this trend, not mentioning the sizable imports that still occur. However, due not only to continuing imports but also to rising exports, the U.S. petroleum market remains tethered to the global market, especially when it comes to prices. As shown in Exhibit 2, West Texas Intermediate (WTI) crude oil prices in Cushing, Oklahoma, the central reference price for the U.S., continue to track Brent crude oil prices, an international benchmark. As a result, when geopolitical issues impact the global petroleum market, the shockwaves carry through to the U.S. market. Ethanol, on the other hand, is produced at over 200 facilities in the U.S., and 1% or less of supply is imported. The U.S. Midwest is a secure source of fuel compared to the Middle East. Moreover, ethanol prices in Chicago, the central reference point for the U.S., averaged 31 cents/gallon less than gasoline (RBOB) futures in 2019, and the correlation between the two has been near zero over the last three years. Ethanol now comprises just over 10% of the motor gasoline sold in the country, and a rule issued by the Environmental Protection Agency in May allowed blends of 15% ethanol (E15) to be sold year-round. Shortly after the rule was published, President Trump commented, “As a result of our action, E15 sales are projected to more than double this year. ... More American ethanol production also means less dependence on foreign suppliers. By fully embracing E15, we will reduce dependence on foreign oil by up to 250 million additional barrels every single year.” Want to use a clean fuel in which the U.S. is truly independent? Choose ethanol.