(The Center Square) – As conflict in Iran escalates, Middle Eastern refineries have been hit and the Strait of Hormuz remains compromised, and oil futures hit $120 a barrel. Physical cargos of crude from Oman and the UAE have already hit $150 a barrel for May delivery.
Prices at the pump and other associated costs are expected to remain high. Gasoline has surpassed $4 a gallon on average, diesel more than $5.25. Despite the Trump administration committing to release 172 million barrels of crude from the Strategic Petroleum Reserve, this is only seen as a temporary stop gap measure. After President Donald Trump said the conflict would be over soon, the Pentagon now is expected to ask Congress to fund a conflict it says isn’t a war – asking for another $200 billion.
“Even if the conflict were to end tomorrow and the Strait of Hormuz were to reopen, oil prices would not return to pre-conflict levels of $67 per barrel,” Andrew Lipow, with Houston-based Lipow Oil Associates, said. “The damage to energy infrastructure is done and will take months, if not years, to repair the more extensively damaged facilities. The damage to Ras Laffan in Qatar will reduce LNG supplies while damage to area refineries will reduce gasoline and diesel availability.”
The impacts for the Texas industry, which leads domestic oil and natural gas production, are at least two-fold, Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association (TIPRO), told The Center Square. “Higher oil prices provide short-term benefit for producers and royalty owners; however, they also increase costs at major refineries and ultimately lead to higher costs for consumers, which is simply a factor of market dynamics that we have no control over.
“The Texas oil and gas industry prefers stability over volatility, even if higher prices deliver short-term financial benefits to some operators. Predictable markets allow for better long-term planning, sustained investment, and reliable supply to consumers.”
TIPRO cautions the administration “against further large-scale draws” from the SPR, he added. “Additional Strategic Petroleum Reserve releases would only provide temporary relief and could potentially undercut the very producers who might be positioned to increase output, even if it’s incremental for a short period of time,” he added.
Lipow notes that while the U.S. “may be nearly self-sufficient in producing enough refined products to meet our demand, it is not in the right place.” When considering national supply sources, east and west coast states import crude oil and refined products and Gulf states export crude oil and refined products, he explains.
The U.S. imports roughly 4 million barrels per day (bpd) of Canadian crude oil, 75% of which is consumed by Rocky Mountain and Midwest refineries, he adds. The Gulf states of Texas and Louisiana export nearly as much of 3.8 million bpd, primarily of light sweet crude. Gulf state refineries also import roughly 1.1 million bpd of heavy crude oil.
Problems will persist on the West Coast because California lost 17% of its refining capacity over the last six months. Due to Democratic policies, both Phillips 66 and Valero permanently closed their Los Angeles and Benicia refineries, The Center Square reported.
West coast states will be forced to import even more gasoline and jet fuel, Lipow said. Alaska is already importing more jet fuel than Hawaii or California with cargo planes coming from Asia refueling in Anchorage, Lipow says.
Prices can be expected to remain high nationally because significant increases in domestic oil production “are months, if not years away,” he said.
Trump’s campaign slogan of “drill, baby drill,” has fallen flat. Rig counts decreased in his first year in office by more than 40. There are 553 operational rigs in the U.S., according to Baker Hughes. “Anything below 500 reflects weakness in the market,” Heywood Cooper with Houston-based Argos Minerals, told The Center Square.
While the Trump administration has touted importing Venezuelan crude as a fix, the short term may result in roughly 300,000 barrels per day (bpd) over the next few months but millions of bpd is years away. “Venezuelan crude is heavy crude and requires a significant percentage of Naphtha to be blended with it just for transportation and handling, for which Chevron has been a source,” Cooper said.
Ongoing risks in the Strait of Hormuz remain a serious concern for the supply side of the industry, the industry insiders said.
Lipow suggested the Trump administration could reduce gas prices by implementing a Jones Act Waiver to “lower transportation costs to deliver fuel.” Trump this week waived the act for 60 days.
Another would be to “pre-emptively have the logistics in place if imports dry up and the shortfall must be supplied off the Gulf Coast. Third, if there is a restriction on crude oil or refined product exports, there will be enough tanker availability to move crude oil from the Gulf Coast to the East and West Coasts.” Yesterday, the industry showed interest in moving a cargo of jet fuel from New York to Hawaii, he said.
Another is for the administration to suspend the federal excise tax of 18.4 cents a gallon on gasoline and 24.4 cents a gallon on diesel fuel. The Trump administration and other states could follow the lead of Florida and Georgia, which both suspended their state gasoline tax several years ago to help offset increased inflationary pressures. Georgia lawmakers this week worked to suspend its gas tax again.
