US Enjoys A Rare Moment Of Oil Supremacy In Iran

Few noticed earlier this month, but there was a symbolic crack in the world’s geopolitical map. Everyone’s attention at that point was on the nuclear talks between Tehran and Washington. In the oil market, some looked at a major shift: For just a week in early June, the US didn’t import a single barrel of Saudi crude — a feat only seen once before in half a century.

The timing couldn’t be more fortuitous. On June 9, US President Donald Trump received a fateful call from Israeli Prime Minister Benjamin Netanyahu saying war against Iran was imminent.

Since the first oil crisis in 1973-1974, generations of American politicians have dreaded a similar call, fearful of the risks around oil. In the global economy there are hardly any certainties, but one of the few is that conflict in the Middle East means higher energy prices. In US politics, too, there are few certainties, but one is that Americans hate expensive gasoline.

These days, however, Washington can worry less about such constraints. The US shale revolution has transformed America into the world’s largest oil producer, elbowing out Saudi Arabia, Russia, Iran and every member of the OPEC+ cartel. This freedom from Middle Eastern oil offers Trump a chance to redo US foreign policy in a volatile region in ways his predecessors could have only dreamed — all without having to fear a recession. On Thursday, Trump said it would give diplomacy a two-week window before deciding whether to aid Israel and attack Iran. Oil may still be an impediment to American war adventurism, but it’s not the major brake it once was. The shale revolution has been a “game-changer for oil markets, prices and energy security,” Fatih Birol, the head of the International Energy Agency, tells me.

The market is making this clear. US oil benchmark West Texas Intermediate has surged 15% over the last week, changing hands at around $74 a barrel on Friday. Zoom out, and the increase is small — less than 5% from where oil started the year. In historical terms, it’s a pittance. WTI is trading at around the same level as it was 20 years ago, and that’s in today’s money. In real terms, adjusted by the cumulative impact of inflation, oil is today at a similar level as it was in the mid-1980s.

A few years ago, the consensus was that an Israeli attack against the Iranian nuclear program would push oil to surpass the all-time high of $147 a barrel set in mid-2008 and perhaps go as high as $200, $250 or even $300 a barrel. The Iranian propaganda machine even talked recently about the risk of $400 a barrel. “This is what everyone thought was the mother of all geopolitical oil risk,” Jason Bordoff, a top oil adviser to President Barack Obama during his first term at the White House, tells me. “And yet, the response is muted compared to ‘definitely triple-digit prices’ everyone talked about.” We’re in the early days, but for now those predictions have proven way off the mark. US drivers aren’t feeling the pain at the pump. Gasoline, the most visible everyday price in the US, is cheaper than it was a couple of months ago during the Easter holiday, the last period of heavy driving.

Although American oil hegemony certainly changes the psychology of the market, it doesn’t mean Middle East outages don’t have a real impact. Hence why I prefer to talk about America’s oil imperialism rather than MAGA’s “oil freedom.” There are still many dangers of the US getting involved in Iran — a desperate Tehran could, even if briefly, disrupt a large chunk of the world’s oil supply. The choke points are ingrained in the mind of generations of oil traders: the Strait of Hormuz, the Kharg Island oil terminal, the Saudi processing plant of Abqaiq, the Al-Zour and Ruwais refineries in Kuwait and the United Arab Emirates. And so on. It’s a long list.

Yet, as the war enters its second week, WTI remains below the nearly $85 a barrel it reached in October 2023, when Hamas launched the attack on Israel which started a cascade of conflict. The reason is that there’s lots of oil, and shale is largely responsible for that.

Today, the US pumps more than a fifth of the world’s total oil. It’s worth repeating: Two out of 10 barrels worldwide are made in the USA. The last time the country had such a large share of the global market was 55 years ago. Saudi Arabia and Russia come in well behind, accounting for about 10% each of global output.

Since the development of hydraulic fracturing, or fracking, about two decades ago, American total oil production has surged. It reached a record high of 20.8 million barrels a day in March, the last month with data available, up more than 180% from the 7.4 million of two decades earlier. Alongside the boom in output, oil imports have collapsed. Back in 2005, the US bought overseas, on a net basis, about 12 million barrels of petroleum — crude and refined products; last week, it exported a net of nearly 4 million barrels a day.

The new era looks like an embarrassment of riches compared with the years following the 1973 and 1979 oil crises, when countries like Saudi Arabia and Kuwait controlled more than half of the world’s oil reserves. The price of oil rose from less than $2 to more than $30, “death to America” became a rallying cry across the Middle East, and the Organization of the Petroleum Exporting Countries cartel became a fixture of nighttime television news. America became addicted to foreign oil (and foreign involvement), and every regional crisis meant economic chaos at home.

Nothing summarizes the new relationship between Washington and Middle Eastern oil better than the amount of Saudi crude flowing into America. After falling briefly to zero in early June, the US has imported an average year-to-date of 259,000 barrels a day from the kingdom. That’s the lowest level since 1985, when flows briefly plunged as Riyadh cut output to try to push oil prices higher. To find several years of similarly low imports, one must go back to the late 1960s, when Lyndon B. Johnson was in the White House.

Unsurprisingly, Saudi Arabia is trying to restore its status in the global oil market, pushing the OPEC+ cartel, which it leads alongside Russia, to boost production to recover the market share the group lost over the last few years. But that’s coming at a cost of lower oil prices.

But no matter how few barrels America buys overseas, the price of oil is set in the global market. A disruption in the Middle East still means higher prices in Washington. The most obvious danger is that the muted market reaction encourages capricious decision-making. I was reporting in Baghdad in early 2003 in the run-up to the American invasion and in Benghazi in mid-2011 during the civil war — I know that what you break, you own. It would be ironic if Trump, who has campaigned on a platform against so-called “forever wars,” starts another.

The other peril is complacency about oil disruptions. “Shale has deluded folks into thinking that the US could replace OPEC as the world’s oil swing producer and that America didn't need to worry about the Middle East from an energy perspective,” Bob McNally, a top oil adviser to former President George W. Bush, tells me. “Neither is true,” he adds. If anyone knows, it’s McNally, who was at the White House’s Situation Room during the 2003 Iraq War.

Indeed, Washington isn’t free from the ups and downs of the petroleum market. Oil is a fungible commodity, and while the US may sell more than it buys, the price at home will always be the same as it is overseas. If the Iranian regime, fighting for survival and with nothing to lose, targeted regional oil facilities and tanker traffic in the Strait of Hormuz, America will feel the pain. And the threat is alarmingly high.

The choke points are obvious. Israel — with help from the US — could disable 90% of Iranian oil sales by attacking Kharg Island, where the country’s main oil export terminal is located. But if Israel has a target, so does Iran. Tehran could attempt to blockade the Strait of Hormuz, disrupting 20% of the world’s seagoing crude.

Then there are the vast Saudi oilfields only 100 kilometers (62 miles) away from the Iranian coast on the other side of the Persian Gulf. In September 2019, Iran — via its Yemeni Houthi proxies — attacked the Abqaiq plant, which serves as the gathering and processing center for the largest Saudi oilfields, including Ghawar. For a few days, the world lost 5% of its oil supply.

Even the collapse of the Islamic Republic is dangerous. Ironically, Iranian oil exports are booming while bombs are flying, with monthly production in June heading toward a seven-year high of more than 3.5 million barrels a day. The chaos that will follow the end of the theocratic rule could send output into a tailspin, as was the case in Libya after the fall of the 42-year regime of Moammar Al Qaddafi. The Libyan crisis kept oil prices above $100 a barrel as the world lost about 1% of global supply.

For now, both sides have largely avoided ensnaring the global oil market. Iran hit one of Israel’s two oil refineries, while its archenemy attacked Tehran’s domestic energy industry, including a gas processing plant and two tank farms around the capital. Neither impacted highly crucial export facilities, and both sides have since refrained from hitting energy assets.

The White House must also be careful about expecting the US oil bonanza to last forever. The country’s geological endowment is marvelous, but it’s finite. Every anecdotal sign suggests that the shale boom is largely in the rearview mirror, with further production gains limited.

Oil remains a boom-and-bust industry, and shale production is extremely price sensitive. The difference between US oil production growing or declining is measured in a fistful of dollars, perhaps as little as $10 to $20 a barrel. At $50, many shale companies are staring at financial calamity and production is in free fall; $55 is survivable; $60 isn’t great, but money still flows and output holds; at $65, everyone is back to more drilling; and at $70, the industry is printing money and output is rising.

Still, even at current prices of $75 a barrel, it’s difficult to see how US oil production would grow much further between 2028 and 2030. When output plateaus, and eventually falls, Washington will have to grapple with the looming problem of domestic oil demand remaining sticky. American petroleum consumption averaged 20.3 million barrels a day in the first quarter, the latest period with reliable data available. That’s on par with pre-Covid-19 figures for the same period, and not far below the peaks reached in 2004-2007.

The problem is exacerbated even more with Trump removing every tax break to shift transportation and heating away from petroleum and toward electricity. On current trends, annual US oil demand will remain above 20 million barrels a day until at least 2030, according to the International Energy Agency. By the end of this decade, the US will still consume more oil than it did in 2015. Among major economies, which are reducing quickly their reliance on oil via electrification, the US is poised to be an outlier.

Imperial ages come and go. America is enjoying a rare moment of oil power, unmatched in the last half-century. But betting on its longevity — and its infallibility — would be a mistake.

Trump seems aware of what’s at stake. Last week, one day before Israel attacked Iran, he was already laser-focused on the rising price of oil. At an event at the White House, he asked US Secretary of Energy Chris Wright, perhaps rhetorically, what was going on.

“Chris you are doing great. But I don’t like that the oil price has gone up,” the president said, with Wright sitting in the audience. “I was going to call and really start screaming at you,” he continued. “Is it going to keep coming down, right? Because we have inflation under control.” Even an oil empire has limits.

Source: Bloomberg Europe