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Oil Import Dependence Not Aways Economic Disadvantage

Oil Import Dependence Not Aways Economic Disadvantage thumbnail

According to research by the Cologne Institute for Economic Research (Institut der Deutschen Wirtschaft Koeln) energy imports should not be “understood as a threat to the security of energy supply and an economic disadvantage” per se. The study – “Does Dependency Equal Vulnerability? Energy Imports in Germany and Europe” commissioned by UPEI et alia and authored by Hubertus Bardt, Esther Chrischilles, Michael Grömling, Jürgen Matthes – finds that conclusion simplistic and points out that energy supply security mainly depends on open (liberalized) and integrated markets.

For the purpose of this article, the study’s second conclusion – i.e. “Germany benefits from the income of oil countries” – is more interesting because it may help limit use of the populist term ‘energy independence’ during the upcoming 2016 US presidential campaign trail. What the US should strive for instead is a healthy energy self-sufficiency – a path the US is already well on thanks to the US shale revolution. The chart below illustrates this as the dramatic increase in US shale and tight crude oil production resulted in a steady decrease of crude oil imports to the US Gulf Coast, particularly for light-sweet and light-sour crude oils. These are the same grades of oil US refiners used to import from West Africa – Angola and, above all, Nigeria.

roman crude imports1 Source: EIA 

Nigeria has seen its oil exports to the US tumble from historical highs to almost nothing.

Before the precipitous decline in oil prices that started in June 2014, rising oil prices as well as increased demand for oil due to economic growth – coming especially from Asia – led to oil windfall revenues in oil-exporting countries. This oil boom, the study explains, led some oil exporting countries to significantly beef up investment. The study highlights the German case: “The German economy and especially the capital goods manufacturers benefit notably from this development. In recent years, around 7.5 per cent of all German exports of capital goods were attributable to oil countries. (…) In particular, the importance of oil countries for German trade surpluses with capital goods has more than doubled in a comparison between 2008 and the 1990s. Most recently, around 17 per cent of this surplus was realised with oil countries. (…) Nominal gross investments in the oil-producing countries have increased six-fold, from just under 240 billion US dollars in 2000 to over 1,450 billion dollars in 2013.”

The following charts – created by the Cologne Institute for Economic Research – bear this out.

Oil-Producing Countries as Investment Sites

roman crude imports2 Source: Cologne Institute for Economic Research, “Does Dependency Equal Vulnerability? Energy Imports in Germany and Europe” commissioned by UPEI et alia and authored by Hubertus Bardt, Esther Chrischilles, Michael Grömling, Jürgen Matthes. 

roman crude imports3

Oil-Producing Countries and Germany’s Foreign Trade

Share of oil-producing countries (1) in Germany’s exports and net exports (2) and capital goods (4), as a percentage

roman crude imports4Source: Cologne Institute for Economic Research, “Does Dependency Equal Vulnerability? Energy Imports in Germany and Europe” commissioned by UPEI et alia and authored by Hubertus Bardt, Esther Chrischilles, Michael Grömling, Jürgen Matthes. 

Oil-Producing Countries Purchase Industrial Machinery ‘Made in Germany’

roman crude imports5Source: Cologne Institute for Economic Research 

Admittedly, the German case is unique in a sense because Germany’s economy is highly export dependent or “internationalized” to use the term in the study. Exports and imports make up 48.8 per cent of GDP – by far exceeding other highly developed and efficient industrial countries, in particular the US. Peter Hintereder and Martin Orth nicely summarize what the German economy is all about: “The German economy focuses on industrially produced goods and services. In particular German mechanical engineering products, vehicles, and chemicals are highly valued internationally. Around one euro in four is earned from exports and more than every fifth job depends directly or indirectly on foreign trade.” In contrast, the US economy is often described as a consumer-dependent economy, in which consumers, for example, tend to benefit from lower oil prices, which has only an impact on the overall US economy if the premise holds that consumers spend the money saved at the pump immediately – and don’t save or use it for paying down debt.

Level of Openness of Selected Large Industrialized Countries in Comparison

roman crude imports6Source: Cologne Institute for Economic Research, “Does Dependency Equal Vulnerability? Energy Imports in Germany and Europe” commissioned by UPEI et alia and authored by Hubertus Bardt, Esther Chrischilles, Michael Grömling, Jürgen Matthes; For the full text of the study in German read here

In sum, even though higher oil prices are perceived as a drag on overall economic activity while the current low oil price environment is often considered a boon, the authors of the study cite additional research to suggest that in the higher oil price environment “the so-called trade effect can produce a positive counter-effect” for the oil importing country. Conversely, sustained lower oil prices may have a negative impact on investment-driven capital goods purchases from oil-producing countries – many with insufficiently diversified economies. It is therefore essential to understand the exact nature of the trade relationship between two countries before unequivocally calling for the end of oil imports from certain countries; namely, whether – first – a windfall in oil revenues in oil-producing countries is likely to increase investments in those countries and – second – whether the domestic economy of the energy importing country is in a position to benefit in terms of international trade from such an ensuing increase in demand for (capital) goods in the oil-producing countries.

Finally, a brief look at the US-Saudi trade relationship illustrates that energy trade is not necessarily a one-way street in economic terms.

According to the latest CRS report on Saudi Arabia – published in January 2015 – Saudi Arabia remained the largest US trading partner in the Middle East in 2013. Citing data from the US International Trade Administration, Saudi exports to the US in 2013 totaled about $51.8 billion while US exports to Saudi Arabia were valued again higher year-on-year at about $18.9 billion. The CRS report also provides the latest trade figures: “[t]hrough September 2014, Saudi exports to the United States were valued at $38.7 billion” with the reverse trade valued at $13.3 billion. Interestingly, the report notes that “[t]o a considerable extent, the high value of U.S.-Saudi trade is dictated by U.S. imports of hydrocarbons from Saudi Arabia and U.S. exports of weapons, [industrial] machinery, and vehicles to Saudi Arabia. (…) Efforts in the United States to produce more oil domestically have lowered U.S. imports of oil overall and contributed to conditions in international oil markets that have put downward pressure on oil prices. Declines in global oil prices are thus likely to have a pronounced effect on the value of Saudi exports to the United States.”

Note, many US companies are well positioned to supply the “fastest-growing non-oil industrial sectors” such as power generation; gas and water equipment/services; transport and communications; and construction going forward. However, most of these sectors depend on government funding and as Joseph Ayoub of the EIA observed: “If oil prices remain low for an extended period and spending levels remain similar to recent history, Saudi Arabia will continue to run a budget deficit. Even with the SWF, Saudi Arabia’s ability to grow, strengthen, and even diversify its economy depends on a steady stream of revenue from the sale of this oil over the long term.” Additionally, in light of the Cologne Institute study it could be argued that it actually may be in the US national interest to continue importing some oil and present itself as reliable trading partner and ally. Saudi Arabia seems to be very fond of US weapon systems with “proposed major US defense sales to Saudi Arabia” in the period between October 2010 and October 2014 reaching over $90 billion. This should not come as a big surprise given the contours of a potential clash with Iran for regional supremacy in the near future. More oil revenues are needed to upgrade those weapon systems and benefit the US defense sector.

roman crude imports7 Source: EIA

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17 Comments on "Oil Import Dependence Not Aways Economic Disadvantage"

  1. Plantagenet on Sat, 28th Feb 2015 4:56 pm 

    You really can’t compare the US to Deutchland in this way. Germany gets about 50% of their GDP from exports. The US, in contrast, runs large trade DEFICITS. So yes, Germany shows a large net benefit from exporting to oil-producing countries. The US—not so much.

  2. GregT on Sat, 28th Feb 2015 5:08 pm 

    Don’t kid yourself Plant. The US exports wars to oil producing nations. War is a very lucrative business and good for GDP.

    http://marketoracle.co.uk/images/2010/Jan/us-collapse-18-11.gif

  3. BobInget on Sat, 28th Feb 2015 7:25 pm 

    GregT should elaborate.
    Saudi Arabia for-instance, remains the forth largest importer of so called “Defense” materials. (behind India, UAE and China)

    2013 rank Recipient Arms imports
    1 India 8283
    2 United Arab Emirates 6153
    3 China 1534
    4 Saudi Arabia 1486
    7 Pakistan 1002
    5 Azerbaijan 921
    6 Indonesia 774
    8 United States 759
    9 Bangladesh 672
    10 Taiwan 633
    11 Turkey 604
    12 Egypt 501
    13 Oman 490
    14 Venezuela 476
    15 United Kingdom 438

  4. Makati1 on Sat, 28th Feb 2015 7:26 pm 

    GregT, we agree. Wars are the US’ main exports and have been for at least 15 years. Now wars are fought on all fronts. Cyber, weapons, propaganda, and financial. Almost every country is involved to one degree or another in several, or all, of these areas. That is why I don’t see BAU holding together too much longer. Certainly not until 2020.

  5. rockman on Sat, 28th Feb 2015 9:34 pm 

    And back to the subject of the thread. As it turns out the Canadian oil sands and the light oils from US shales are a match made in heaven…at least in refinery heaven.

    Reuters – President Barack Obama has implied that the proposed Keystone pipeline would be of little benefit to U.S. refiners because it would carry Canadian crude across the United States for export to foreign markets. “Understand what this project is,” the president said. “It is providing the ability of Canada to pump their oil, send it through our land, down to the Gulf, where it will be sold everywhere else.” The president was poorly briefed. U.S. refineries are processing record volumes of Canadian oil, even as U.S. production is rising, and they are hungry for more. Canadian oil is being processed together with U.S. shale oil to enable U.S. refineries to make best use of their equipment, which is why refiners support Keystone.

    Without more imported Canadian oil refineries will have to turn to other suppliers of heavy crude. The prime candidates would be Venezuela, Saudi Arabia, Iraq and Mexico. Policymakers who suggest the United States need not build pipelines from Canada, and should maintain restrictions on the export of domestic crude to promote national energy security, do not understand how refineries operate.

    U.S. refineries are already struggling to maintain their preferred blend in the face of a torrent of light oil from Bakken, Eagle Ford and the Permian Basin. Even with rising Canadian imports, the average API gravity of crude processed at U.S. refineries has risen from a recent low of 29.9 degrees in June 2008 to a high of 31.8 degrees in September 2014.

    In the 12 months to September, average API gravity rose by almost a full point, which is an enormous shift in such a short time. In the short term, refineries have some operational flexibility. But the record suggests this flexibility is limited to changing the average crude mix by 2 or 3 degrees API at most. U.S. refineries cannot run on an exclusive diet of 40 degree shale oil without enormous and expensive investment in new equipment.

    Production from the major U.S. shale plays is likely to flatten this year after growing by around 1 million barrels per day in both 2013 and 2014. But if shale starts growing again in 2016 and 2017, it will need to be coupled with increased imports from Canada.

  6. Plantagenet on Sun, 1st Mar 2015 11:23 am 

    Great post, Rockman.

    Thats exactly the point I’ve been making.

  7. Northwest Resident on Sun, 1st Mar 2015 12:21 pm 

    That is a really good post, rockman. It explains a lot.

    Unstated, of course, is that what you have explained is the sad and sorry state of oil production that the USA and Canada have been forced to engage in absent new discoveries of sufficiently large and accessible conventional oil deposits.

    The industry described in your post above is hugely expensive and energy intensive. It takes enormous amounts of energy to power all that extraction, transport and refining, leaving hundreds of billions of debt and not nearly enough net energy as a result.

    As ingenious and technologically advanced as oil extraction and processing has become in the twilight hour of the age of oil, it is ultimately destined to be nothing more than a blip in time, an intense flash of light before darkness sets in.

    I think people in power know that, which might explain why Obama is prevaricating and obfuscating on the subject of the Keystone pipeline. At this point in time, what good does it do to dedicate scarce resources to such an immense project that will have such a short lifespan AND that would cut yet another jagged scar across otherwise good and productive habitat and farmland.

    Of course, he can’t stand at the presidential podium and explain it that way, but my guess is that the real reason for his veto of the Keystone pipeline might have something to do with the rational just stated.

    Or, alternatively, Obama vetoed the Keystone pipeline to “get even” with Red states — an infantile and moronic POV expressed by this article:

    http://dailycaller.com/2015/02/27/pipeline-politics-the-real-reason-behind-obamas-keystone-veto/

  8. marmico on Sun, 1st Mar 2015 12:28 pm 

    Enbridge’s Flanagan South pipeline to Cushing is operational. A mini end-around the Keystone XL.

    Capacity is ~600,000 b/d. Oil sands dilbit is 20-22 degree API, i.e. heavy oil.

  9. rockman on Sun, 1st Mar 2015 2:04 pm 

    NR – “…people in power know that, which might explain why Obama is prevaricating and obfuscating on the subject of the Keystone pipeline.” I think that’s probably true of most politicians (D&R) and industry “leaders”. They all spin for the political agendas as well as self-preservation. IMHO the same is true for the global warming issue.

  10. shortonoil on Sun, 1st Mar 2015 2:05 pm 

    It takes enormous amounts of energy to power all that extraction, transport and refining, leaving hundreds of billions of debt and not nearly enough net energy as a result.

    Actually, its worse than that:

    http://www.thehillsgroup.org/depletion2_023.htm

  11. rockman on Sun, 1st Mar 2015 2:29 pm 

    Flanagan South has actually be flowing for almost 3 months now. Given all the ridiculous attention given the rather irrelevant KXL permit folks might not know much about the FS Pipeline:

    It’s bringing heavy crude from collection terminals in Illinois to an Oklahoma storage hub. Flanagan South made its initial delivery the first week of December, 2014, to an Enbridge Energy facility in Cushing. Built at a cost of $2.6 billion, the Flanagan South line has the capacity to transport nearly 600,000 barrels of oil per day. The diluted bitumen is eventually destined for refineries on the Texas Gulf Coast via an expanded Seaway Pipeline system. Flanagan South’s product begins arriving at a time when crude stocks at the Cushing storage hub reportedly had fallen to nearly a minimum-operating capacity.

    The newest Enbridge pipeline was constructed adjacent to the company’s existing Spearhead line, which has been in operation since the 1950s. Along its 600-mile path, Flanagan South crosses four states and 31 U.S. counties — including eight in Illinois, 11 in Missouri, seven in Kansas and four in Oklahoma.

    {Interesting we’ve heard almost no protests and MSM reports about a pipeline crossing so many jurisdictions that has the same capacity as the “horrifying” northern leg of KXL, eh? But the Rockman has presented this end run for more then 2 years as well as end run by the Keystone Pipeline connecting to the southern leg of KXL, with another 600,000 bopd capacity. It’s been moving oil directly from Alberta to Texas for more then a year. This has been the reason for storage volumes at Cushing falling so low.}

  12. synapsid on Sun, 1st Mar 2015 3:14 pm 

    rockman,

    Well now, we’ve been told that if the contested northern segment of KXL were to be completed then all that Canadian oil would just flow across our country and down to the Gulf Coast to be exported elsewhere, so where’s the gain for the US?

    After all, isn’t that what happens to all the Canadian crude that comes down via Keystone, and via the new Flanagan South? It is, isn’t it?

    Isn’t it? (crickets)

  13. Davy on Sun, 1st Mar 2015 3:43 pm 

    If we have the potential for a liquid fuel crisis at any time. IMHO any and all liquid fuel supply enhancing infrastructure is OK. The shit storm is coming there is no stopping it. Another pipeline bringing crude down to offset crude not available elsewhere is a plus. Oil is a global market and the US is engaged in a global refining market. This Canadian tar sand supply allows options and security.

    I would say to the greenies let’s focus on a carbon offset from coal to justify the added tar sand supply. I am appalled at the strip mining in Alberta. The environmental damage is horrendous. The carbon generated is huge. Yet, the immediate danger is a collapsed civilization from liquid fuel starvation. We are ever closer to this. When the crisis unfolds we will need liquid fuels to mitigate and adapt to lower economic activity. How are we going to keep food in the grocery stores? That is my opinion as a non-expert. I am all ears for other thoughts.

    To the greenies you can bitch about carbon from the tar sands but don’t forget to mention to your flock what a liquid fuel crisis means. Let them know they may be hungry soon. If there is one thing that disturbs me about the greenies it is that they generally fantasize of a clean low impact BAUtopia. They want the comfy BAUtopian life but with low carbon and low ecological impact technologies. Technological and ecology do not go together. My point is if you want your low carbon world then you want collapse. Greenies do not confuse and delude people into thinking they can have their cake and eat it. Reality does not work that way.

  14. rockman on Sun, 1st Mar 2015 4:39 pm 

    Syn – “After all, isn’t that what happens to all the Canadian crude that comes down via Keystone, and via the new Flanagan South? It is, isn’t it?”

    As pointed out before how much Canadian oil may or may not be exported out of Houston is of no relevance to US citizens: they neither buy nor consume the Canadian oil. But they do buy and consume refinery products. Refinery products which, since their export isn’t banned, are exported at the rate of about ONE BILLION BBLS PER YEAR. Any hype about re-exporting Canadian oil is just another Red Herring like the contrived controversy over the KXL permit. Just more illusions to delude the simple minded. Thank Dog we don’t have any of those types here. LOL.

  15. synapsid on Sun, 1st Mar 2015 10:53 pm 

    rockman,

    I should have added /sarc ?

  16. rockman on Mon, 2nd Mar 2015 7:03 am 

    Syn – I figured that but I was bored on a Sunday afternoon…nothing worthwhile on the Boob Tube. Not even boobies. LOL

  17. synapsid on Mon, 2nd Mar 2015 6:42 pm 

    rockman,

    C’mon, that tube will rot your mind. You can quit, really you can. Others have.

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