Opinion: Hormuz Crisis Exposes the West Coast’s Self-Inflicted Fuel Risk

By Sam Norton, CEO of Overseas Shipholding Group, Inc

Managers across fuel supply-chain logistics are increasingly concerned that, unless restrictions on oil flows through the Strait of Hormuz ease quickly, physical fuel shortages could begin to appear within weeks.

This risk is greatest in Asia, where countries are far more dependent on Middle East crude and refined products than the United States. However, the U.S. is unlikely to be immune. West Coast markets—unlike other domestic regions—lack crude and product pipelines from the U.S. Gulf Coast, making the region an “energy island” that must rely on marine imports to cover a crude-oil deficit of nearly 1.4 million barrels per day.

Recent refinery closures in California have also increased the need to import refined products; the state now imports more than 20% of its needs, much of it from Asian refineries that are among the most exposed to a crude-oil supply squeeze stemming from the war in the Middle East.

Some may point to the Jones Act as a contributor to this vulnerability. But political choices and geography-driven market economics have played a much larger role in creating the current risk. In a normally functioning market, fuels produced in Korea or Japan can be the preferred supply for distribution hubs from Alaska to California because those refineries are generally closer to West Coast destinations.

In addition, Pacific shipments avoid the added costs of transiting the Panama Canal, making marine transport from North Asia to U.S. Pacific states less expensive than moving product from the U.S. Gulf Coast—regardless of a vessel’s flag.

The need for refined-product imports in the first place reflects policy decisions in California that have contributed to the closure of more than 500,000 barrels per day of refining capacity over the past decade. Environmental policies in Alaska have also coincided with a decline in crude-oil production from more than two million barrels per day at its peak to less than 500,000 barrels per day today. These choices created a vulnerability to market disruptions that was—or should have been—well understood when they were made.

Energy dominance can only go so far without clear thinking about how to make our country’s energy wealth accessible across the entire nation. That means building robust—and, in some cases, redundant—production and logistics systems that ensure communities can access critical fuels regardless of geopolitical disruption.

In those circumstances, relying on free markets alone may not be enough. Forethought and preparation sometimes require investing in assets and capabilities that only prove their value in moments of crisis. How many times must the costs of short-term thinking be exposed before this lesson is learned?

Disclosure: The opinions expressed in this op-ed are solely those of the author and do not necessarily reflect the views of gCaptain or its affiliates.

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