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By Frank N. Newman
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The Iranian IRGC is using the closure of the Strait of Hormuz to put economic pressure on the U.S., especially through higher gas costs for Americans. But America does not depend on oil sent through that passage, and the closure does not provide any good reason for U.S. gasoline prices to increase.
Kuwait, Qatar, Iraq, and Bahrain have no alternative to shipment through the Strait of Hormuz. But that oil is shipped largely to Asia–notably China, India, and Japan. Only very small portions of the oil shipments sent through the Strait are destined for the U.S. There is no reason for U.S. consumers to face big increases in gas prices just because supplies from the Middle East to Asia have been impeded.
The U.S. produces more oil than it needs; it is a net exporter of oil and petroleum products. Problems in the Strait need not change the amount of oil produced in the U.S., nor the cost of pumping oil in the U.S., nor the amount of gasoline produced and used in the U.S.
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But when prices recently increased for oil internationally, U.S. oil companies also raised prices stateside. This has largely been accepted as common practice—but makes no sense. The net result is that U.S. consumers pay more for gasoline, while American oil companies make a lot more money. U.S. oil companies’ production costs are the same as last month, so the domestically produced gasoline they now sell to American consumers, at higher prices, provides a huge profit windfall.
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Oil industry claims that “prices are set in worldwide markets” seem to imply that much gasoline sold to Americans is made from oil purchased in global markets. That was a viewpoint established decades ago, when the U.S. was highly dependent on oil imports. But it does not apply in today’s world, where the U.S. produces as much oil as it needs.
There are differences in types of oil in the U.S., but that does not alter the logic. Most of the oil produced in the U.S. is “light”. But some U.S. refineries use “heavy” oil. That means that the U.S. trades about 30 percent of its light oil for heavy oil, predominantly from Canada and Mexico, with small portions from Saudi Arabia, Iraq, and Brazil. U.S. companies sell U.S. light oil at the new market price and buy the same amount of oil, heavy, at about the same price. The U.S. balancing of oil types results in no net cost to the U.S. companies and no dependence on oil delivered through the Strait of Hormuz.
For companies producing gasoline in and for the U.S. market, the net increase in costs as a result of the closure of the Strait is essentially zero, providing no justification for charging higher prices in America.
In addition to raising prices, U.S. oil companies may be deliberately diverting some of the production that would normally be used for U.S. consumers, so that they can sell it at high prices to other countries. But that would be a violation of a long-term understanding between America and its oil companies: the companies are given many privileges, including on public lands, and they are supposed to provide reliable production for America’s needs, at fair and reasonably stable prices.
The closure of the Strait is a serious problem for several U.S. allies in the Middle East, as well as in Asia, but the U.S.-Israeli program against the IRGC terrorists has vital objectives, primarily assuring that the IRGC will not have nuclear weapons, and substantially reducing IRGC capacity for terrorism. The U.S. should not let artificial increases in U.S. prices for gasoline lead us to waver from those critical goals.
The American press, public, and government should put a spotlight on U.S. oil and gasoline companies, explaining why there is no legitimate basis for them to set prices in America any higher than they were last month. The higher prices simply provide profits at the expense of American consumers.
Once gas prices decline in the U.S., perhaps the IRGC will realize that keeping the Strait closed would harm China, India and Japan, not America—and they might reopen the Strait.
Frank N. Newman is the Former Deputy Secretary of the Treasury.
The views expressed in this article are the writer's own.
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