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Rather than boon for Japan, U.S. shale oil is still rip-off

The oil industry in the United States is booming with the shale gas revolution — a major technical breakthrough for extracting oil and gas trapped within shale formations. This led President Barack Obama on June 24 to lift the 39-year-old ban on petroleum exports.

In August, Cosmo Oil Co. of Japan started shipping shale oil to Japan from the U.S. Gulf of Mexico coastal area. Volume is expected to reach 300,000 barrels in October. Thereafter, Japanese trading firms will fall in line, boosting the volume to half a million barrels per month.

The news is being welcomed by those engaged in the energy-related business in Japan, since the American shale oil is said to be priced about $3 lower per barrel than Mideast crude oil.

Imports from the U.S. could reduce Japan’s dependence on oil from the Middle East, which currently accounts for more than 80 percent of its total imports of crude oil.

Ironically the latest development is pleasing the American oil industry more than Japanese importers.

Crude oil production in the U.S. exceeded 10 million barrels a day in 2013, and the International Energy Agency predicts that, in 2015, the U.S. will replace Saudi Arabia as the world’s largest oil producer.

Yet the U.S. will remain a net importer of oil because it consumes 20 million barrels a day — the largest amount in the world. It stands to reason, therefore, that the U.S. should use its new shale oil for domestic consumption rather than exporting it to other countries.

Surprisingly and interestingly, however, the quality of American shale oil is too good to be used in the U.S., resulting only in growing inventories. The reality seems to be that U.S. oil firms are using Japan as a destination for shale oil which they would have to sell at cheap prices inside the U.S. — on the pretext of helping a country with very limited energy resources.

Shale oil, which is light, low in sulfur content and rich in condensates, is easy to be processed into such oil products as gasoline and jet fuel. But these characteristics do not fit the refineries concentrated along the coasts of the Gulf of Mexico, which have been designed to process heavy crude petroleum imported from Venezuela and other Latin American countries.

Besides, since shale oil, which is produced in Midwestern states like North Dakota, has to be transported by trains or trucks — due to insufficient availability of pipelines — to the refineries located along the coasts of the Gulf of Mexico, its transportation costs are high.

Thus there are not many purchasers and they are beating the prices of shale oil down. The resulting sluggish sales have brought the shale oil prices down to levels that are $10 to $20 below the price of the low-grade North Sea Brent crude oil per barrel.

Since 1975, two years after the 1973 oil crisis, the U.S. has banned the export of domestic crude oil to protect its own oil resources and cope with a rise in domestic oil consumption under the Energy Policy and Conservation Act enacted in 1975 from the viewpoint of energy security. But gasoline, diesel fuel and other oil products have been exempted from the ban in consideration of the interests of the refinery industry.

The shale oil glut has brought about a major change. The powerful oil lobby, in close cooperation with its allies among certain Republican senators, pressed the government to allow the export of shale oil on the grounds that since its main component is condensates, shale oil is similar to gasoline, which is not subject to the export ban.

The Obama administration has given in to that lobbying and permitted shale oil export. According to an American energy industry insider, the oil industry is intent on getting rid of excess inventories of shale oil by selling it to Japan “which is naive enough to buy high-priced oil obediently.”

The U.S. will be producing 3 million barrels of shale oil per day by 2017. A high-ranking official of Japan’s Ministry of Economy, Industry and Trade (METI) said the U.S. will be capable exporting 1 million barrels a day in 2015.

In Japan, not only oil refineries but also major trading firms have become interested in importing American shale oil, attracted by the fact that it is about $3 cheaper per barrel than crude oil from the Middle East.

If Japan could import 1 million barrels of American shale oil per day in the near future, that would account for nearly 30 percent of its total oil imports. If that becomes reality, Japan will no longer have to suck up to Middle Eastern oil suppliers, the METI official said.

However, the American oil industry appears to be pushing a shrewd strategy. The U.S. has been importing Middle Eastern oil at cheaper prices than Japan has been. Saudi Arabia adds a “Japan premium” to the price of oil it sells to Japan because it knows Japan, which is almost devoid of oil resources, is eager to buy higher-priced oil.

On the other hand, the Middle Eastern oil-supplying countries have to offer special discounts to the U.S. because the U.S., as the largest oil importer of the world, has easy access to crude oil from neighboring countries like Venezuela, which is rich in heavy crude petroleum as the Middle Eastern countries are.

So the U.S. is working toward a situation in which the U.S. buys low-priced crude oil from Saudi Arabia and other Middle Eastern countries, which would greatly benefit domestic consumers, while profiting big on exports of shale oil, already in excessive supply, to Japan at high prices.

As of June 2014, the price that Japan paid for Arabian light crude oil from Saudi Arabia was as high as $109.70 per barrel. The price consists of the average monthly spot price of Dubai crude oil, which is of lower quality than shale oil, plus the premium charged to Japan. Reliance on such high-priced Middle Eastern oil was the reason that Japan’s oil imports in 2013 were worth a whopping total exceeding $14 trillion.

In the U.S., shale oil is sold at about $90 per barrel. As they are not well- versed on the global oil-market situation, Japanese oil companies and consumers are naively pleased to buy American shale oil for $3 less per barrel than what they pay for crude oil from the Middle East. But they are paying nearly $20 more per barrel than the price at which shale oil is being sold within the U.S. domestic market.

Moreover, Dubai crude, whose price serves as the basis for determining the prices at which Japan buys imported oil, is quite vulnerable to crises and political tension in the Middle East.

Any heightening of geopolitical risk in the region could immediately push up the price for oil originating in Dubai, which in turn would give an excuse to American shale oil producers to raise the prices of shale oil exported to Japan.

Japan hopes to be able to import low-priced oil as a result of the slackening of the demand-supply ratio in the oil market caused by the shale gas revolution. But its hope may well prove to be completely off the mark.

Japanese businesses and consumers are likely to continue to purchase rather expensive oil products and to pay 2.5 times more for electricity than their American counterparts do. Therefore, Japan’s valuable national wealth will continue to drain.

It must not be forgotten that the U.S. behaves as if it’s all too ready to use even a close ally as a stepping stone to its own prosperity.

This is an abridged translation of an article from the September issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.

  • phu

    “It must not be forgotten that the U.S. behaves as if it’s all too ready to use even a close ally as a stepping stone to its own prosperity.”

    That’s cute, but as the article itself makes clear, it’s US companies that are taking advantage here; the government is simply acting in its lobbyist-corrupted usual manner (just like most other governments do, unfortunately).

    These companies operate at the expense of US citizens just as much — if not more — than at the expense of foreigners and foreign markets/corporations, so don’t feel too bad, Sentaku. You’re not the unique and special victimized snowflake you seem to believe you are.