Strait of Hormuz tensions underscore oil market’s global scope

President Trump has claimed that turmoil in the Strait of Hormuz matters less than in decades past, now that U.S. oil production continues to grow while imports fall — a view that does not reflect the global nature of today’s oil market.

The big picture: Middle East tensions have heightened following multiple attacks against oil tankers in the Strait of Hormuz, a 2-mile shipping channel exiting the Persian Gulf through which about one-fifth of the world’s oil passes each day. Even though the majority of those shipments are bound for Asia, the interconnectedness of the global oil market means demand surges or supply disruptions in any region affect oil prices worldwide.

Context: U.S. imports from the Gulf fell to 1.5 million barrels per day last year, down from a high of 2.7 million bpd in 2001. Celebrations of U.S. energy “independence” or “dominance” aside, the U.S. is still vulnerable to swings in the global oil market.

• The risk isn’t directly to physical supply, but rather to price movements that affect business and consumers alike.
• Past oil price spikes have coincided with numerous conflicts in the Middle East where physical supplies to the U.S. were not threatened. And current instability in Libya, which produces far less oil than the Gulf countries, could spark an increase in global prices.
• While record levels of domestic production mean that U.S. producers would benefit more than in the past from high prices, the average American could still face sticker shock at the pump.

What to watch: The standoff between the U.S. and Iran escalated Wednesday when Iran shot down an American surveillance drone.

• In response, prices of Brent crude, the global benchmark, climbed more than 5% Thursday morning. Further conflict could drive prices higher still.

The bottom line: The only way to be “independent” of the oil market is to not use oil. Until then, a supply disruption anywhere is a disruption to prices everywhere.

Richard Newell is president and CEO of Resources for the Future and a former administrator of the U.S. Energy Information Administration. Daniel Raimi is a senior research associate in RFF’s Energy and Climate Program.