Transcript: Webinar – Iran War Energy Disruption: Short-Term or Here To Stay?
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PANELISTS
Robert McNally
President, Rapidan Energy; Former Senior Director for International Energy, U.S. National Security Council
The discussion was moderated by JINSA President and CEO Michael Makovsky, PhD.
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TRANSCRIPT
Transcript has been lightly edited for flow and clarity.
Michael Makovsky, PhD:
Hi. This is Michael Makovsky, President and CEO of JINSA. Thank you very much for joining this afternoon. I’m honored to be speaking with a good friend of mine, Bob McNally. We knew each other in the Bush administration. I worked in the Pentagon. He worked in the White House.
We’re very lucky to have Bob, a leading oil energy analyst and expert, to try to explain to us what’s going on and where we’re going. He’s the founder and president of Rapidan Energy Group, an energy consulting firm. Prior to founding Rapidan, he served as a White House energy advisor.
Thanks very much for joining us today.
Robert McNally:
Mike, thank you very much. It’s great to be with you. I’m a big fan of yours, and of JINSA.
My view is, the United States and Israel are on a collision course with the Iranian regime. The world’s too small. The Middle East is too small. And after 10/7, I was convinced that it was a matter of time before there would be an ultimate showdown with this regime. And I was so convinced that I did a big study.
Mike, you and I did this for President Bush, back in the day. When you think you’re going to have a war in the Persian Gulf, and you think about energy, you want to kind of wargame it and map it out. You want to say things like, ‘well, let’s look at how long Iran could choke off by far the world’s most important energy artery for oil and natural gas. What are their military means to do? What are our military means to prevent it?’ et cetera. And then, you look at how the arteries in the energy system work. Where do we flow gas? Where is it produced? How can we redirect?
So we did a massive study, in 2019 actually, when there was a lot of tanker fighting. And then we did it in June. We hired a military officer, a retired Navy captain. The long-story-short is that it would not be easy to quickly clean up the Hormuz Strait. Before getting into the nitty gritty, I think one thing is important to discuss.
Think about the concept of a load-bearing assumption. That is, an assumption that is so deep and widely-held that to think otherwise is almost absurd and a waste of time and too shocking. So it could be something like the United States will never de-peg from gold, which we did in 1971, or the Federal Reserve will never let a bank go under—like Lehman Brothers, in 2008. Or, the Bank of England will not devalue the pound. These ideas were deeply embedded.
Until nine days or so ago, if you had suggested to somebody or asked them to think about a world in which all of the maritime traffic through Hormuz was stopped by an adversary, they would tell you—and they told me—that ‘you’re out of your mind. There’s no way an American president would allow an adversary to do something so harmful for the global economy.’
What the Houthis are doing at the Bab el-Mandeb and the Red Sea, that’s bad, but there are ways around that. You go around Africa, it’s no fun, but you can still do it.
The world can’t operate without the Hormuz Strait working. And so it’s like asking people, ‘What happens if we woke up and the sun rose in the north instead of the south? What would that do to agriculture? You’re suggesting something so absurd that no one will take you seriously. Well, we are now day 11 into something that was thought to be impossible.
Now, on Sunday night, we had the biggest hike in oil prices ever: almost to $120 a barrel from like $80. Traders started to understand that Hormuz is not opening soon and without 20 percent of our production, oil prices must rise. This is just the law of supply and demand. It’s a brutal law, brutal. It says the price will go high enough to kill 20 percent of your consumption, because you cannot consume that which you cannot produce, and we’ve lost 20 percent of production. There are inventories. We can talk about inventories and SPR and we’ll get into the details, but that’s the overview.
Now, then what happened? President Trump yesterday went on CBS News and said, ‘Don’t worry. The war is about over. It’s going to be over soon.’ Traders were so happy to hear that, because they thought, ‘this is crazy that the Iranians are stopping traffic in Hormuz. But that’s over, right?’ Okay, good. And everything sold off, and now we’re back down to $90 a barrel or so.
I don’t say this with joy. Just the opposite. I’ve checked with my friends who are military experts, companies who have heard from military experts, and I don’t think we’re going to open up Hormuz anytime soon. I hope we do. But If we don’t, everyone’s going back to the nightmare that they thought was just impossible, and they thought only lasted a day. So every day that goes by, there used to be 100-plus tankers that would go through the Strait of Hormuz, and now there’s like three or maybe five—or maybe zero.
Everyone’s sending me these charts that are floating around the internet showing the Iranian missile salvos are going down, the drone attacks are going down. Okay, what we’re degrading in Iran is important. It’s good. It’s the kind of thing that can hit Israel. But it’s not the things that they need to stop ship traffic and more moves. What they need and still have is ASCMs, anti-ship cruise missiles—mobile, with launchers. They have fast-attack boats, artillery, and mines. CBS News is reporting active signs of mining. And they have drones.
Believe it or not, these little subs that are actually hard to detect and can be used for torpedoes also can be used for laying mines. Think about a game of Whack-a-Mole, except there’s thousands of moles, and they’re all up and down the coastline. Consider that last April, the U.S. was military pummeling the Houthis for 52 days. 52 days. 1,000 strikes. One billion dollars that we spent. And we failed.
At the end, the Bab al-Mandab was still closed. Trump had to declare a ceasefire with the Houthis. The Houthis are inferior to Iran in their weaponry and how good their coastline is—Iran’s is much longer. So, we have to have clear eyes.
Michael Makovsky, PhD:
Let’s get into some of this.
When you say that there’s only maybe a few ships getting through, can you explain why? Is it the insurance rates? Is it the military threat? Why aren’t ships going through the Strait of Hormuz?
Robert McNally:
Fear, risk, and fear.
Those insurance companies, they’re talking to the military. They know what I’m talking about here. They’re looking at the ASCMs, the mines, the drones. The sinking of Iran’s ships, that’s a side show. The ships were never going to be a risk to Hormuz. It’s the asymmetric, layered capabilities that Iran has that the insurance companies are worried about.
Even if you saw the resumption of insurance coverage, the tanker owners may not risk it. Can you imagine a cargo tanker if the Iranians hit one, a full ship of oil? You won’t do it. And plus, the seafarers declared the area a war zone. The seafarers can say, we won’t go. Some of the oil companies may say, you go, or I’ll send you back to Sri Lanka. They may do that. But what we have to see is Iran’s military ability to threaten the Strait of Hormuz, that has to be degraded.
Michael Makovsky, PhD:
There has been some reporting on that East-West pipeline in Saudi Arabia. I guess the throughput is something like 2.5 million barrels a day. And now, I thought, the Saudis said that ‘we’re going to try to meet 7 million barrels a day.’ Can you explain?
Robert McNally:
Yeah, sure. Okay, so prior to the conflict, 15 million barrels a day of crude was flowing through Hormuz. There happened to be 5 million barrels a day of refined product like gasoline and diesel. The East-West pipeline that you described, which goes to Yanbu on the Red Sea—until recently, the maximum throughput capacity was 5 million barrels a day. However, Aramco just announced they were able to boost it to 7 million barrels a day.
Now, there are drag agents. You can put chemicals in the oil and it flows faster, so it’s going from five to seven. But remember, what matters for replacing a part of that 15 is how much extra space there was, not the whole capacity, right? Because, let’s say, before the war, about two million barrels a day was already flowing through it. That would mean that if you assume five, there’s only three extra. If we assume it went up to seven, that means there’s room for five, which is good. That means 1/3 of your 15 million barrels a day, theoretically could be redirected away from the Strait of Hormuz through the pipeline—due to that unused capacity, which is now higher because of the drag agents—to Yanbu. And that’s a good thing.
Michael Makovsky, PhD:
Are there other ways to get oil out from the region? For instance, through Iraq or Turkey?
Robert McNally:
I mean, there’s Kirkuk in Iraq, and that’s been utilized—but it went down. The only other option currently available is this new pipeline, the Habshan–Fujairah Pipeline in the U.A.E., about a million and a half barrels per day capacity. But, the Iranians hit the Fujairah terminals on the Gulf of Oman.
For crude, it’s just that East-West pipeline. Now, for refined products, there’s nothing. That’s why Europe is getting killed, especially on jet fuel, and the airlines are just getting ready to go out of business. Europe needs a lot of refined product. And, what’s worse, LNG.
Ras Laffan, Qatar’s premier LNG facility, had to shut down. Not so much because it was hit, although it was. Really, though, because they don’t have anywhere to store LNG. You cannot store LNG, really. So when you can’t store it, and you can’t ship it, well, you can’t produce it. So they’re shutting down that facility. There’s no redirect for the LNG. Maybe, there is a little bit for the crude.
Michael Makovsky, PhD:
So when the Qataris talked about this being shut down, they weren’t just trying to heighten their economic leverage in the markets?
Robert McNally:
For sure. It’s real.
Michael Makovsky, PhD:
Now you’re starting to see the oil fields shut down in Iraq, Kuwait, and Saudi Arabia. Look, if you can’t put it on a boat, and you can’t store it, you have to stop producing it. You can’t bring it out of the ground.
How damaging is this? How long could a field be shut down without it being permanent?
Robert McNally:
That’s a good question. We’re looking into that. It depends on the field.
As you know, those Gulf producers, the OPEC ones, they’re used to volatility. They have to go up and down because of OPEC quotas. So certain fields, you kind of cycle it up and down. You’re used to that.
However, there are other fields that you don’t do that with. And the risk is that if you shut down one of your old workhorse fields, especially if you have to do it abruptly—though they saw this coming—there is a risk that getting it back up after a while could take, could take a while. We’re still looking into how much and which fields. I know the U.S. government is very concerned about that as well, so we’re still looking into that. It’s a valid concern.
Michael Makovsky, PhD:
Let me ask you another technical question about the oil.
Those 15 million barrels a day, to come out, was it all roughly the same quality of crude? My recollection is that when President Obama was president and we had the conflict with Libya, there was less oil disruption, because of the quality of Libya’s crude. It sort of disrupted the market, but in different ways.
Is the Saudi crude and the Emirati crude and the Iraqi crude that’s not coming out, is it roughly the same kind of oil?
Robert McNally:
Yeah, it is. It tends to be of the medium-to-heavy, sour quality—rather than the super light. I read today again, going back to this East-West Saudi pipeline, it turns out that more oil can be put through the pipeline if it’s lighter. So the Saudis are actually putting Arab light through. Now, their light is a little more medium in our API, you know, it gets into the definitions.
Basically, what we lost from Iraq, from Kuwait, and from Saudi Arabia, mainly, were heavier and sour grades that tended to go to Asia, which has sophisticated refineries that would turn them into refined products. That’s mainly the situation.
Michael Makovsky, PhD:
About what percentage of that oil was going to Asia, roughly?
Robert McNally:
China was getting, I think, 40 percent of their oil from there. The crude, probably 75 to 80 percent was going to Asia. We were importing a little bit. Europe was importing a little bit, but Europe was really importing more the refined products. I’d say the vast bulk of it, 60 or 70 percent was going to Asian refiners, and all the LNG, pretty much, pretty much, all the LNG was going to the Chinese.
Michael Makovsky, PhD:
The Chinese have been trying to build up their reserves over the years. How does this affect that? We also know they were buying roughly close to 90 percent of Iranian oil, and at a heavy discount. How ready do you think the Chinese are for this?
Robert McNally:
They have got 1.2 billion barrels. They’ve got a lot, and they’ve been buying a bunch of oil and storing it for this day. A colleague of mine, a Chinese-American, a great patriot, he watches it for us closely. And he said they’re just terrified.
It’s not like they’re thinking, ‘Good thing I stored up all the oil. I’m fine.’ No, no, no. They’re terrified. They’re screaming at Iran, ‘Don’t you dare mine the Strait. Stop fighting.’
China is terrified. They’re terrified that Iran is going to stop loading at Kharq Island. 40 percent of China’s oil is coming from the Persian Gulf, through the Strait of Hormuz. So, yes, they have stockpiles. They’re in a better situation due to that. But they are not complacent at all about this, and they were begging Iran to not mine the Strait of Hormuz. CBS News reported right before we started that Iran has started mining the Strait.
You know, China might have become the swing producer of refined products. They were a big exporter of gasoline, jet fuel, diesel. They shut all that down. Asia, we’ve seen in past crises—past Middle East wars—that the Japanese, the Koreans, the Chinese, they go into hoarding mode because they’re so import-dependent. Their stocks are there, but they are worried about a prolonged disruption, and so they’re in hoarding mode and very, very anxious.
Michael Makovsky, PhD:
An issue I feel doesn’t get enough attention is the SPR, the Strategic Petroleum Reserve. President Biden brought it down by almost 40 percent, not because of any particular emergency, but just because he was trying to offset the inflationary pressures that he was engendering with his budgetary policies.
A lot of the oil, most of the oil, from the Hormuz was going to Asia. The oil market is, obviously, a global market. How is this affecting the United States?
Robert McNally:
First, let’s talk about natural gas. With natural gas, we’re having low prices. The rest of the world is seeing soaring prices. That’s because, when it comes to gas or LNG, it’s really expensive to transport it. So you can have different prices, really different prices, in different parts of the world.
For electricity and our industrial costs and home heating and everything with gas, we’re in good shape. With oil, our economy is in good shape, because we’re a large producer, and we’re an exporter. So our trade deficit, our GDP is okay. Our oil industry, all associated industries, investors in the oil industry, are all doing well.
However, the consumer is going to get gut-punched. And if this continues and sticks, it’ll start to negatively affect the supply-side and raise inflation concerns. We are insulated a little bit, and we’re not as vulnerable to a physical loss of supply like China or Japan or South Korea or Singapore. However, in terms of the price, it’s all the same.
Mike, a supply disruption anywhere is a price hike everywhere, including here. And, you know, we started this thing, average gasoline prices were at $2.80 in the last year. Right now they’re at, I think we’re now at $3.54 and we’re heading towards $4.00 as the average in the country.
California will be way higher and then it gets embedded, as, you know, on the supply-side. Actually, diesel for the economy is more important. The gasoline is the thing that consumers see, and they all freak out. But the diesel is, you know, all the ships, anything you buy anywhere. Anything you go and buy at Whole Foods came out of a truck, and was produced with oil, and wrapped in oil and oil products. So, it’s embedded.
If these price rises stick, it creates the inflation problem. And then the Federal Reserve is having to worry about inflation. It’s the last thing they need. If they think it’s temporary, they’ll look past it. But if we think these prices are going to stick and rise, you can’t. So while we are insulated on the gas side, our economy is fairly well-protected because we export and we produce a lot, consumers are still vulnerable.
Michael Makovsky, PhD:
Let’s talk about where we’re going and the fundamentals of the market right now.
Robert McNally:
Well, people say, ‘what about an SPR release?’ You know, ‘is there anything that can be done here to alleviate the cost and so forth?’ Mike, you’ve been through this fire drill before. So have I. During an energy crisis, there’s the laundry list of things to do, and those policy options range from marginal to purely symbolic to really stupid and counterproductive. And part of your job as a policymaker is to hope that they choose the marginal and symbolic, and not go for the really stupid. Let’s go through those.
Marginal would be an SPR release. Our old boss, Dick Cheney, was very opposed to using the SPR. And the Japanese, and the Europeans, want to. But let’s just do some quick math.
There’s 15 million barrels a day of crude going through Hormuz. Maybe five of that could be redirected. So let’s say there’s 10. The SPR, if we do it with the Europeans and the Japanese, we all do it together, that is 2 million barrels a day, right? Typically, the United States draws by one. The rest draw by one. One plus one is two. So it’s, you know, it’s still a fraction. You’re not solving the Hormuz math problem. It’s better than nothing, but it’s marginal.
There are good ideas, like easing the Jones Act, which prohibits the transport from a U.S. port to a U.S. port on anything but a U.S. built and crewed vessel—there are not a lot of them. And so, basically, you can’t buy. New England has to buy gasoline from Europe and can’t buy it from Texas because there’s not enough ships to economically bring it to Texas when that pipeline is full. So easing that act is very controversial, because the shipbuilders union goes crazy, but there is something you can do.
There are little things you can do. You can ease environmental regulations on gasoline, vapor pressure. Mike, you’re familiar with all these. But these things are minor and to some degree symbolic.
There are bad ideas circulating. One is to restrict exports. Really bad. Doesn’t work. Won’t work for very long, maybe a few days, a week or so, and then we destroy investment in the oil sector. We’ll lose trust and credibility if we do that. Another one, some of Trump administration officials have said—Mike, I know you’re an old futures guy—maybe the Department of Energy should get in there and the Department of Treasury should start trading futures.
There’s a rumor going around this morning that Treasury was selling WTI swaps, basically betting that WTI crude oil prices would go down. That wasn’t true, but they’re considering it. That is really dumb, in my view. But you know, you can’t underestimate the panic of an elected official, a president, when they’re faced with those rising energy prices. Especially this, the biggest disruption.
The only thing that’s ever worked in the past is you call up Saudi Arabia and you say, ‘Can you please produce more oil?’ And if they do, good. But now, that won’t work because Saudi Arabia is blocked.
Michael Makovsky, PhD:
It’s like with the missiles that we are hitting in Iran. It’s the launchers that matter the most, because you have to use them to deliver those missiles. It’s the same with the oil.
So a release of the SPR, if there’s a G-7 release, you don’t think that will have much of an impact?
Robert McNally:
No, unfortunately. Nothing will solve this but restarting the free flow of ships through the Strait of Hormuz. It’s the only solution.
Michael Makovsky, PhD:
Let’s say, for the sake of argument, the regime falls.
Look at countries in political transition or turmoil. We saw this with the Soviet Union. We saw this with Libya. We saw with Iraq after the 2003 war. Sometimes, it can take countries a while to get their act together, which often impacts their oil industry.
If the regime fell, and it was almost immaculate, and you had a new government take over right away, maybe everything would be nice. But if there’s more turmoil and a real revolution, and drawn out, I don’t think it necessarily leads to a boost in Iranian oil exports. Do you?
Robert McNally:
Let’s take the Soviet Union. That’s a very interesting case.
Initially, after the Soviet Union collapsed and Yeltsin was in, Russian production soared. They invited Western companies to come in, and quickly, you saw a big boost in Russian production. Now, what happened? Putin came in and, okay, and now they’ve stagnated. I think that early Russian example, though, is hopeful.
If Iran can have a stable regime aligned with the West, I think it would be much more positive than, say, Venezuela. There, even if we have perfect conditions in Venezuela, friendly governments, elections, everything’s fine, that’s like a manufacturing process. I mean, it’s the biggest reserves, but it’s turning gunk into oil. It’s a manufacturing process with regards to heavy oil.
Iran is just conventional, good old-fashioned oil and gas, like second-largest gas reserves or something like that and it’s right near infrastructure. They can send it out. And so, if we imagine Iran with a stable government, I mean, there’s so many beautiful things that come from it.
From a security and economic standpoint, Russia would be screwed. All of a sudden we wouldn’t be building pipelines through the Black Sea. We’d be building pipelines through Central Asia to bring it out through Iran, plus Iran could supply itself. So, Mike, I think you could get like that Russia in the 1990s boost.
Now, you’d have to have stability. So it all depends on the nature of that successor regime. I’m pretty pessimistic about a lot of things, but I think Iran is going to end up good. I think Iran is going to end up with a stable regime in love with Israel and love with the United States, like its people are. They’re a proud and entrepreneurial people.
It’s going to be a great story when this regime is over with, and I rarely get so optimistic about an idea. I think Iran may surprise us as to the upside. So that is one place I allow myself to be a little optimistic.
Michael Makovsky, PhD:
I remember testifying before Congress in 2011 or so, and some Congressman asked what country the most optimistic about. I said, ultimately, I’m the most optimistic about Iran. When you look at dictatorial regimes, the people are very capable. They have a lot of resources.
Let me ask you a few more things. Will the crisis fundamentally alter the market going forward? Could this be good for U.S. oil and gas producers, as well as Venezuela—which the United States now influences—if people don’t want to be too dependent on a risky situation in the Strait of Hormuz?
Robert McNally:
Let’s assume there’s no physical damage to infrastructure. That is very important, because so far, both sides have been restrained in limiting their energy infrastructure attacks to domestic—meaning their domestic facilities, their refineries, their fuel depots. They haven’t hit export terminals, Kharg Island or the Ras Tanurah terminal in the UAE. They did hit the Rasulullah refinery today.
So, it’s getting more serious. But they haven’t hit Abiqaiq, the most important, valuable piece of real estate on planet Earth. So far, they’ve been restrained. Let’s assume this crisis ends without long-term physical damage to infrastructure and all that is impacted is Hormuz. Mike, you asked about this. You know, some of the fields may take a while to bring back on. You may have some delays there. Ultimately, however, I don’t think on the oil side too much changes.
Where I can see a bigger change is on LNG. LNG is really consequential. You’ve got oil in Africa. You got oil in the Americas. We’re the fastest growing oil nation. Argentina, Guyana, Brazil, and Canada, have oil.
With LNG, it’s like three countries: Australia, Qatar, and the United States. And Qatar was just proven to be enormously risky, and it is shutting down exports. That is going to terrify Asia. And so Qatar’s position as a reliable LNG supplier is going down. Now, we have investors looking at LNG who are going to attach a permanent premium onto us, and Australia, and any other marginal players. But those are the main supply centers projects. So, LNG, I see a bigger structural impact, and with oil, less so.
Michael Makovsky, PhD:
So there will be a greater demand for U.S. and Australian LNG, and a premium on the price. Maybe the Qataris will invest a little less money in our university and education system, and that’s less money for Hamas. I see.
Anyhow, let me ask you another question about the market. Maybe it doesn’t get as much attention, but it’s related. It’s about the products market, including fertilizers and that sort of thing. Could this have some impact on other industries? Could this have a ripple effect on commodities?
Robert McNally:
Yeah, you’re right. I’m not an expert, but it impacts sulfuric acid and then fertilizer feedstocks, like nitrogen gas. Basically, food comes from fertilizer. Fertilizer comes from natural gas. 20 percent of natural gas is gone. You may have food crises in the Gulf producers.
Remember, the Strait of Hormuz is 21 miles in its narrowest point. Think about it like I-95, for those of you on the East Coast. It’s like a highway with two lanes called TSS, Traffic Separation Scheme. And it’s two miles wide each. Each highway lane, so to speak, is two miles wide, and you’ve got to stay in that lane because it’s shallow elsewhere. And so it’s like I-95 on a busy day, and you’re going to have to worry about getting food up in there while you’re wanting to get the oil out.
So even when it unlocks, there’s going to be congestion, and that’s part of the problem with the vulnerability of the strait. It’s not just 21 miles, it’s those two-mile-wide lanes. So even Iranian artillery can hit that. They know exactly where the ships have to be anyway. I digress, but yeah, it’s a problem for more than just oil and gas.
Michael Makovsky, PhD:
You know, when the Iranians started firing and hitting drones and missiles at their neighbors, Trump raised it. And I’ve talked to some experts, certainly on the Israeli side, that say, ‘Well, that was stupid, because Iran is forcing these countries that weren’t even involved in this war to align themselves with the United States.’ We’ll see.
Qatar, reportedly, is upset at Hamas. Not for October 7, but because they haven’t condemned these Iranian attacks on Qatar. And supposedly, we’ll see if they actually do it, they’ve asked some of these Hamas leaders to leave Qatar.
On the other hand, it sounds like the picture you’re painting is a pretty negative picture of the global energy sector. Is that how you see it?
Robert McNally:
Mike, here’s my concern. If I were still in government, I would have advised them to prioritize the degradation of Iran’s abilities to choke oil. Iran’s strategy, its only way to get leverage, especially after June, is to inflict an oil price spike on Donald Trump. It’s the only way. I call it flashing the Glock. It’s the only thing they can do to get leverage over Trump. They don’t have military escalation.
Iran knows if Donald Trump calls up Netanyahu now and says gasoline is at $4.25 and the Dow is down 10 percent cut it out, he will. That’s what I’m afraid of. I think what the President is doing with Iran and Israel is courageous, principled, correct. This regime needs to go. I’m concerned, though.
Look, the Foreign Minister of Iran, is sending out tweets with the pump price increases in major U.S. states. They know that if they can just keep oil prices high, they can impose a political cost on Trump and get him to back off.
That’s part of the reason they’re attacking their neighbors. They have to adopt a very different strategy, because I think they feel it’s essential. They need to make it everybody’s problem, and Trump’s problem, especially at the pump.
That is why it’s so important, not only as an energy matter, but just to avoid losing this conflict and prematurely ending it, leaving an intact Iranian regime angry, embittered and reconstituting. I wish the Trump administration would just do it differently on oil. They have got to get the Strait of Hormuz open and push back those Iranians from threatening it, as a strategy for winning the conflict.
Michael Makovsky, PhD:
What can we do? You seem not to think releasing some of the SPR would have an impact. Why is that exactly?
Robert McNally:
Yeah. It was shameful for Biden to sell down almost half the SPR for no good reason. Though, to be fair, Congress, both parties, even before Biden, were selling it down because they thought we didn’t need it. They said, ‘Oh, we’re set with shale oil. We produce all the oil in the world. We don’t need an SPR, let’s sell it off just to pay the bill.’ That was stupid, too.
Since Russia invaded Ukraine, Congress is no longer engaging in that stupidity. But you had Biden selling off, so now it’s at 60 percent of capacity. President Trump, to his credit, wants to rebuild. We have got to wait until prices go down. And that we should do, however, again, it goes back to Hormuz. Hormuz is too big of a problem.
I mean, even if we assume the SPR caverns are working—I know there’s debates and discussions—about that, the DOE says initially it can flow just the U.S. SPR at 4.4 million barrels a day. Do I believe that? No.
What’s a more reasonable number? What have we seen in history? 1 million barrels a day? But let’s assume optimism. Let’s say any another country does one, that’s two. Two, compared to 10 million barrels of crude that we lost. Hormuz is just too big of a problem for even a functioning, full SPR to solve. That’s the problem with Hormuz. That’s why we have got to solve it. You have got to open that thing up.
Michael Makovsky, PhD:
Now, we do have product reserves here, right?
Robert McNally:
We got rid of it. We only had a little bit up in the Northeast. We got rid of it. It was marginal, like Rhode Island had some terminal somewhere with 1 million barrels.
Michael Makovsky, PhD:
Would that be something actually worth reviving?
Robert McNally:
I don’t think so, because it’s not like the industry doesn’t know how much oil to hold, or that the government knows better. I mean, I don’t know about you, Mike, but the older I get the more libertarian I become. I just think the government’s wisdom is limited. So, to say that we need to mandate this, or mandate that, suggests the government has better data analysis or information than the private sector, and everything in my life experience tells me that’s not the case.
I don’t think mandating reserves is the way to go, and I don’t think it makes sense for the government to go buy a bunch of oil and store it, since that would be very expensive.
From our perspective, we are a producer, and we have a lot of refining for our military. We’re well supplied. It’s about really dampening the price effect, and that you have to have, like, Chinese-style huge SPRs. And we’re not going to be doing that.
I think it’s important for your viewers to kind of just understand the math problem. That’s what makes these prices move so wildly. It’s just a math problem.
Michael Makovsky, PhD:
Thanks so much. It’s been terrific talking to you, as always. And I appreciate your involvement with JINSA. Thank you so much.