You may be one of those Americans who has quit watching the news. But even if you don’t watch or read any news, you still know something’s going on. You’re reminded each time you gas up. Oil prices in early April were hovering around $110 a barrel. At the end of February, oil was trading in the mid-sixties range. That was an increase of around 70 percent in about a month. Let’s take an overall look at this critical world commodity.
On a global basis, the world produces around 100 million barrels of oil a day. Who’s the leading producer? We are! That’s right, the United States. You might have guessed Saudi Arabia, or some other Middle Eastern country. But it’s the United States, producing around 20 million barrels a day, Coincidentally, we also use around 20 million barrels a day. Perhaps you’ve heard the comment that we’re now energy independent, since we produce and consume about the same amount of oil daily. To some extent that’s true. But it’s not that simple. In fact, we export some of the oil we produce, and we also import oil as well.
The next leading oil producers are Saudi Arabia and Russia, each with about 11 million barrels a day. Canada produces about five million barrels a day and sends roughly four million barrels to the U.S. Canada is our major supplier of imported oil with Mexico being a distant second. Of the 20 million we produce, we export about four million, primarily to Europe and Asia.
One fifth of the daily global production comes from middle Eastern countries and has to pass through a narrow stretch, the Strait of Hormuz. Currently, Iran has this strait locked down, threatening to attack any ships passing through it. The U.S. uses very little of the oil passing through the strait. Nevertheless, the virtual stoppage of this major supply chain has created the sharp increase in prices.
Oil is a global commodity that trades on a global market price. So while the Strait of Hormuz is on the other side of the world, U.S. oil producers still collect the world market price. In March, the U.S. announced the release of 172 million barrels of oil from our Strategic Petroleum Reserve. Given our level of usage, that’s less than nine days! That release of oil is more symbolic than it is strategic. Reopening that strait is critical to oil prices returning to normal levels.
This isn’t meant to be a downer of a discussion; rather a 30,000-foot view of the global oil market with actual numbers. Markets have a way of working things out. Oil producers want to sell oil and consumers across the globe need fuel for their daily lives. That interaction of buyers and sellers is a powerful force. The political and economic consequences of this disruption will hopefully move us to a quick resolution.
What to do as an investor? Global equity markets have remained resilient despite the short-term uncertainty of the Iran situation. A broadly diversified portfolio of both U.S. and foreign stocks and bonds has worked well over the long run. History shows that financial markets ultimately reward patient, disciplined investors, in spite of short-term disruptions that regularly occur.