General

In July, the international oil price hit the highest price in the year of US$6.95 a barrel. In the following month, it has been fluctuating within this range. As a result, the United States has been affected by international oil prices, coupled with high domestic inflation and other issues. Domestic oil prices have been rising. In August, the average price of regular gasoline in the United States reached its peak, at $3.25 per gallon.

In order to control oil prices, the Biden administration has made two announcements, urging the Organization of the Petroleum Exporting Countries (OPEC) and its allies to increase oil production. Because the rise in oil prices will seriously affect the economic recovery in the United States after the epidemic. Even U.S. National Security Adviser Sullivan also said that the world’s major oil-producing countries, including Saudi Arabia, did not provide enough oil for the world.

Why did the United States fall so far?

Prior to this, the development of shale oil in the United States enabled the United States to become an oil exporter from a major oil importer. This "shale oil revolution" is the use of water pressure and drilling technology by the United States. Combining the two can significantly increase domestic oil production in the United States. The most likely increase is the production of tight oil. Tight oil in the United States accounts for 36% of its domestic production. This new production capacity reduces the United States’ dependence on overseas oil imports.

The peak of the development of shale oil in the United States was in 2012, from 2 million barrels a day to more than 9 million barrels a day. This growth rate indeed proved that this technology is very powerful, and the output has more than quadrupled. Therefore, the United States was still a big oil exporter at that time. In 2014, the export volume soared from 40,000 barrels a day to more than 3 million barrels a day, which directly increased by more than 70 times!

But now as the United States is in a difficult situation, the status of the US dollar has gradually declined, and the US shale oil industry has also been affected. The severity of the epidemic coupled with the Federal Reserve's quantitative easing policy has made the shale oil industry encounter difficulties in capital operations. Many small and medium-sized companies in the United States cannot rely on the market to achieve capital turnover; therefore, they cannot provide funding for drilling projects.

This has led to a gradual increase in the cost of debt in the shale oil industry. Data shows that in 2019 alone, the interest paid on borrowings exceeded US$650 million. According to relevant data, since 2010, the capital consumption of the US shale oil and gas industry has reached 300 billion U.S. dollars. In the second quarter, 18 industries declared bankruptcy one after another. Therefore, U.S. shale oil companies will eventually have to conduct a new round of mergers and acquisitions to solve financial problems, while domestic crude oil prices are unlikely to reverse in the short term.

What are the influences of China?

The United States has always been a major oil exporter before this, and China’s rapid development has made people eye-catching. China's average daily crude oil imports in 2017 climbed to 420 million tons, surpassing the US's 395 million tons for the first time, and became the world's largest crude oil importer for the first time. This enabled many countries to start oil trade with China. Therefore, international oil prices are bound to be affected by the Chinese market. In addition, my country opened up domestic crude oil futures trading in 2018 following the trend, which increased its impact on the pricing power of oil prices.

In addition, some "hegemonic" actions by the United States are puzzling. Prior to this, the United States forcibly cut off Iran’s central bank’s access to services, which prevented Iran from conducting oil trade overseas, which resulted in a 83% reduction in Iran’s exports in April this year. After that, China became Iran's largest export destination. Among them, due to the sanctions imposed by the United States on Iran, it has signed a 25-year crude oil settlement agreement with my country in RMB. In doing so, the United States has allowed more and more countries to start "de-beautification" transactions, and it has also directly shaken the foundation of the dollar's oil control.