Robert Carpenter, Editor-in-Chief
Rockets go up, rockets come down. Energy prices go up, energy prices come down. Inflation goes up, inflation goes down. Thus, the unfortunate cycle of the war in Iran.
Of course, that’s too simplistic as people are dying and fighting in the historically troubled region. But the fact remains, the cycle will play out and hopefully sooner rather than later. As of this writing (late March), the war side of the equation was shifting gears. The renegade country had expended over 85 percent of its ordinance with little to no chance of replacing or manufacturing more.
While air missions still pounded strategic sites in Iran, the remainder of the attacks had devolved into “hunt and seek” missions to eliminate pockets of the zealot Islamic Revolutionary Guard Corps (IRGC) resistance, which are/were still trying to block the Gulf of Hormuz or wreak havoc in general. The U.S. countermoves included the famous A-10 Warthog aircraft and Apache helicopters essentially made for close ground support and are effectively destroying any attack boat threat.
The reasons for this war are well-documented. So are the oil impacts. Since oil is used in nearly every part of our lives − from manufacturing and travel to trucking produce to grocery stores and consumers' online orders to homes and businesses − economists worry about how the spike in oil prices will affect inflation and economic growth.
The cost of oil is the primary driver of retail gasoline prices, typically accounting for more than half the total price per gallon, according to the Energy Information Administration. And we’ll soon be in the summer season in the U.S., where more people will be on the highways traveling for vacations, as refineries have their temporary slowdowns to perform annual maintenance.
So far, investors and economists cling to hope that the spike in oil prices won't last. Indeed, on March 23, the Dow jumped by several hundred points upon comments from President Trump and oil prices dropped. The irony is that while the U.S. is a net exporter of oil and on paper has more than enough oil and gas to meet our needs, it is also still a major importer of oil, as well.
This is the part that confuses most people. If the U.S. produces so much oil, why import any at all? The answer comes down to chemistry and infrastructure. American shale wells, particularly in Texas and New Mexico, produce mostly light, sweet crude oil. But many U.S. refineries, especially along the Gulf Coast and in the Midwest, were built decades ago to process heavy, thick crude oil. Most refineries are unable to process light, sweet crude oil from fracking shale fields. Retooling those refineries would cost billions.
That awkward dynamic could soon begin to change. In early March, President Trump was at it again, announcing that America First Refining (AFR) is opening the first new U.S. oil refinery in nearly 50 years in Brownsville, Texas. The $300-billion cost will be supplied by Reliance, India’s largest private-sector company. Reliance has signed "a binding 20-year offtake term sheet" with America First, meaning it will buy products the refinery produces. That will help cut India's trade surplus with the U.S.
The refinery is specifically engineered to process American light shale oil, which is cleaner, more efficient and less costly to process than heavier imported crude. Once operational, the AFR refinery will redirect up to 60-million barrels of U.S. crude annually back into domestic refining, strengthening American industry, energy security and economic growth. Groundbreaking is expected in the fall.
But in the meantime, we’re still at war. We still get heavy oil from abroad and, at least for now, the U.S. still doesn’t have the refinery capacity to process enough of our native oil to meet our needs. That may be changing soon, especially if we can get back to building domestic oil pipelines. UI