Oil is fungible

FP Passport is drawing the wrong conclusions about the graphic accompanying today's story in the Washington Post about global oil production. (see right; source: Washington Post) FP writes: 

First, despite repeated calls to wean America off Middle Eastern oil, the United States actually imports most of its foreign oil from our friendly neighbors to thenorth and south. Also, while we hear countless warnings of China's impending rise and the impact growing Chinese demand will have on oil markets, the U.S. still imported nearly four times more oil than China in 2007.

There are a couple problems with this analysis. First, it doesn't matter who the United States buys oil from, because oil is a fungible commodity, which essentially means that all units of oil are substitutable no matter where they come from. Once refined, oil from Canada is the same as oil from Saudi Arabia. Thus, even if we buy our oil from Canada, another country that wants oil will have to get theirs from Saudi Arabia. Put another way, if Canada decided to stop selling us oil, it wouldn't harm the US as long as they sold it to someone else (let's say Australia.) This would mean that the overall global supply of oil remains constant, and the US could then just buy oil from another producer instead, perhaps whoever was selling to Australia before they started buying from Canada. Back in February, Hugo Chavez made this same mistake about his ability to play hardball when he threatened to stop selling Venezuela's oil to the US.

What does matter is how much oil is actually for sale globally (supply) and what proportion of this the US actually buys (consumption). Our consumption drives up the overall demand for oil, which includes demand for oil from the Middle East.

Second, of course the United States imported four times as much oil as China in 2007. We are the richest, most industrialized country in the world, and they are not. But they're growing rapidly, and the point is that as China industrializes, it increases the total global demand for oil, which creates upward price pressure. It also raises the future price of oil, as traders bet that China's oil consumption needs will grow as it further industrializes (that's a pretty solid bet.) In short: American oil needs + China's oil needs + future perceptions about these two countries' oil needs = higher oil prices.