VERUM Insights...

The Market Law Of One Price—How The Donald Bombed Energy Consumers, Too

The Donald plunged into one hell of a hornets nest when he took the bait from Bibi Netanyahu and launched an all out "kinetic" war on Iran (as distinguished from the brutal economic war Washington has been waging for decades). But now that the gasoline pump price has breached $4/gallon and is heading higher, he’s desperately looking for an off-ramp.

Yet the one he has seized upon in the last 48 hours or so is not even remotely fit for purpose. To wit, he threatens to pick up Washington’s military football and go home, leaving what’s left of the Iranian government—mainly the brutish IRGC—in charge of the Strait of Hormuz. That is, operating a toll booth and military checkpoint on a waterway that had been open to world commerce free of charge until the Donald foolishly unleashed bombs and missiles on Iran on February 28th.

"we don’t import much oil from there anymore……within 2-3 weeks, we’ll leave. That’s not for us. A guy can take a mine, drop it in the water. That can be for France or whoever is using the strait".

The presumption, of course, is that because the US imports virtually no petroleum from the Persian Gulf the new Hormuz toll booth is Europe’s and Asia’s problem, not Washington’s. And that’stechnically true but here’s the spoiler alert: What matters is not the geography of where the barrels of hydrocarbon molecules are moving from and to at any given point in time, but the level of hydrocarbon prices embedded in the digital bits coursing through the global futures and cash markets all the time and everywhere.

That’s because the latter reflects the markets’ judgement about the state of global supply, demand and inventories in totality. Unlike the Donald, traders on the exchanges are fully familiar with the potent process of market arbitrage. In this case, it means that when the same hydrocarbon molecule has radically different prices around the planet, then some enterprising traders will buy them where the price is low and ship them to where it’s high, and pocket the profit, net of shipping costs, insurance, interest carry cost and other nits and nats of market operation.

The consequence, of course, is the "law of one price" worldwide. Rather than zero exposure to the Persian Gulf’s slow-steaming barrels of hydrocarbon molecules, the US has 100% exposure to Gulf-impacted digital price bits being digitally transmitted instantaneously around the planet on a 24/7 basis.

Accordingly, if the Donald thinks the oil price is going to be high in Europe and Asia because they get their hydrocarbon molecules from the Persian Gulf and low in the USA because we are 100% self-sufficient in oil and gas, he is sadly and utterly mistaken. The digital networks of the paper and cash markets will quickly equilibriate the price of hydrocarbons on a worldwide basis, and the physical barrels will not be far behind.

So lets start with the home team that the Donald thinks somehow operates as an economic island all by its lonesome, unconnected to the global markets. But for this purpose we must look at the entire oil and natural gas complex because under the law of one market petroleum and nat gas molecules are highly interchangeable. And we also measure everything in BOE (barrels of oil equivalent) in order to avoid apples and oranges on the price quotations.

Thus, if we look at just the domestic energy patch, the massive output of the US natural gas industry—-heavily driven by fracking—towers well above conventional US crude oil production, including fracked crude. To wit, in 2025 field production of natural gas (i.e. "wet gas") was 26.5 million BOE/day while crude oil and condensate from the field was 13.6 million BOE/day.

In terms of physical molecules and pricing, however, upwards of 30% of field production (7.9 million BOEs/day) of so-called "wet gas" consists of NGLs (natural gas liquids), mainly ethane, propane, butane and natural gasoline. All of these go into the same end markets—heating, cooking, petrochemicals and transportation—as similar liquids obtained from refinery runs of crude oil. The common molecules from both streams, therefore, are subject to the law of one market.

Thus, the 22.5 million BOE per day of total "petroleum liquids" supply shown in the table below includes a very large component of Natural Gas Liquids (NGLs) as follows:

• Crude oil + lease condensate: 13.6 BOE/d

• Natural Gas Liquids (NGLs): 7.9 BOE/d

• Refinery processing gain: ~1.0 BOE/d

The above hints at the price linkage between the oil and gas markets. The U.S. petrochemical industry, for instance, uses ethane as the primary feedstock for steam crackers that produce ethylene, which is the building block for plastics, packaging, and countless other products. Ethane from two main sources competes for the feedstock requirements of the steam crackers:

1. Field-produced NGLs (extracted from wet natural gas at gas processing plants)

2. Refinery-sourced ethane (produced as a byproduct when refineries process crude oil)

At the present time, NGL-derived ethane is generally cheaper and more abundant — especially from shale gas basins like the Permian and Marcellus owing to the continuing oversupply of natural gas. So it has captured the lion’s share of U.S. cracker feedstock in recent years.

By contrast, refinery ethane tends to be more expensive and less consistent in volume, so it often serves as a secondary or swing feedstock. Moreover, when NGL supply surges or the global price of crude oil and its derivatives rise, the ethane cracker feedstock competition intensifies. On the margin, petrochemical operators shift even more heavily toward the cheaper NGL-derived ethane, thereby linking U.S. natural gas prices to the global petroleum markets.

In any event, the convention with respect to industry statistics is to include NGLs extracted from natural gas wells in the "petroleum liquids" category. So to avoid double counting, we include in the table below only the dry gas portion of nat gas field production, which gets distributed to end markets by pipelines.

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