At
first glance, it seems puzzling. The United States is now one of the largest
oil producers in the world and in many periods produces more petroleum than it
consumes. If that is the case, students naturally ask: shouldn't domestic
prices be insulated from global shocks?
The
short answer is no, because oil markets are fundamentally global.
Crude
oil is a globally traded commodity. Even if the United States produces a large
volume of oil, the price that producers receive—and refiners pay—is determined
largely in the global benchmark markets, particularly Brent and West Texas
Intermediate (WTI). If a supply disruption occurs in the Middle East, or if
global demand increases in Asia or Europe, prices tend to adjust worldwide.
American producers can export oil, and American refiners can import
oil, so domestic prices remain tightly linked to international markets. In
economic terms, oil is part of an integrated global market, not a closed
domestic one.
Another
factor students often overlook is the role of the U.S. Strategic Petroleum
Reserve (SPR). The SPR is the world's largest emergency stockpile of crude oil,
created after the 1970s oil embargo to help cushion supply disruptions. The
reserve stores crude oil in large underground salt caverns along the Gulf Coast
of Texas and Louisiana, where the geology allows enormous quantities of oil to
be stored safely and relatively cheaply.
According
to the Department of Energy, these caverns were created by dissolving salt
formations deep underground and can hold hundreds of millions of barrels of
crude oil. The entire system has an authorized capacity of about 714 million
barrels and currently holds a little over 400 million barrels, meaning it is
well below full capacity.
The
SPR acts as a strategic buffer, not a daily supply source. Oil stored there
cannot immediately offset large market movements because it can only be
withdrawn at a limited rate and is intended primarily for major disruptions
such as wars, natural disasters, or severe supply shocks. Even when releases
occur, they mainly help stabilize markets temporarily rather than permanently
change the underlying global supply-demand balance.
This
also illustrates an important limitation of many risk models used in finance.
Traditional Value-at-Risk (VaR) approaches often assume that price movements
follow relatively stable statistical distributions. But commodity
markets—especially oil—are heavily influenced by global geopolitical events,
policy decisions, and sudden supply disruptions. When an unexpected event
shifts expectations about global supply or demand, prices can move far more
dramatically than a normal distribution would predict. In statistical terms,
these markets exhibit fat tails, meaning extreme price changes occur more
frequently than simple models assume. The global integration of oil markets,
combined with the possibility of large supply shocks, is one reason risk
managers often complement traditional VaR models with alternative approaches
that better account for tail risk.
Markets
that depend on geopolitics rarely behave like the tidy bell curves we put in
our spreadsheets.





