In the blustery winter of 1950, U.S. Major General Oliver Smith and his elite 1st Marine Division were surprise attacked by some 3,000 Chinese troops as the Americans attempted to take control of the mountainous eastern coast of North Korea. Suffering 1,500 casualties and over 4,000 wounded, Smith withdrew his force and delivered his now-famous quote: “Gentlemen, we are not retreating. We are merely attacking in another direction.” Smith then reassessed strategy, regrouped, and, with fresh supplies and ammunition, drove the Chinese off in one of the most heroic struggles in military history.

There’s a powerful lesson investors in today’s volatile market can take away from Major General Smith. Namely, that when the going gets tough and you feel backed into a corner, there is a way to come out on top. But, like Smith, you need to continually reassess your approach and have the conviction to go in a new direction.

Some might say the U.S. now finds itself backed into a foxhole when it comes to meeting its energy needs. Although it has the highest rates of energy consumption in the world, it’s no big news that America’s traditional sources of oil are either tapping out or have become “No Trespassing” zones, leaving the U.S. dependent on foreign sources for 70% of the oil needed to keep the lights on. It behooves us, then, to better understand the nature of the foreign sources. To do so, we are going to use an approach usually found in a military context, dividing the sources into Allies vs. Axis - an appropriate model given the current war being waged for global resources.

With Friends Like These…

To better understand the reliability of America’s oil imports it’s helpful to see who America’s faithful oil-suppliers are - and who they aren’t. The chart shows that 54% of U.S. crude imports come from countries we consider Allies willing to work with the United States (shown in black and grey). Some 31% of imports come from Axis countries (shown in shades of red) that have demonstrated hostility to America. Another 15% are from Saudi Arabia, a Wildcard we believe could go either way. It’s unsettling to note that almost half of U.S. imports come from countries that are either unfriendly or have the potential to be.

The Allies

“A faithful friend is a strong defense; And he that hath found him hath found a treasure.” - Louisa May Alcott

First, let’s take a look at the good half. Although these oil exporters have been willing enough to work with America, they face their own internal challenges. For example, the U.S. has powerful competition for both Canadian and Mexican oil; and it’s from these countries’ inhabitants themselves. Canada already consumes 90% of the crude it produces, while Mexico consumes a growing 60% of its production. Further, both face challenges with their reserves. The only abundant reserves Canada has are the oil sands - expensive and difficult to extract. And Mexico, with its reserves dropping quickly, is likely to become a net importer of crude in about six years. Read that last sentence again, because right now Mexico is the third largest source of oil to the U.S…just after Saudi Arabia.

Shifting farther away from the continental U.S., the stability of exports from Nigeria and Iraq is challenged by internal unrest. Nigeria is destabilized by ethnic battles, ongoing supply scares, kidnappings, sabotage, clashes with militants and election unrest. In addition, resource competitors, including China and India, are both making inroads in that country. Meanwhile, Iraq’s reliability is largely dependent on a long-term U.S. presence in the area, a presence that is in doubt.