The Iranian government is rattling sabers once again, and the Trump administration is rattling back. In years past those tensions would have sent world oil markets into a panic. Not so this time around—at least not yet. And one important reason is the U.S. has become so dominant in crude oil and natural gas production and export.
In response to the escalating tensions between Iran and the U.S., some Iranian officials have threatened to close the Strait of Hormuz. It’s not the first time the country has made the threat; it happened in December 2011.
About 18 million barrels of crude oil per day pass through the Strait of Hormuz—about 30 percent of the world’s sea-born oil in 2016. The Strait is a roughly 21-mile wide passage separating the Persian Gulf from the Arabian Sea. However, the shipping lane is reportedly only about two miles wide. That’s why the Strait is often referred to as one of the world’s most important chokepoints.
The United Arab Emirates and Oman are on the south side of the Strait, Iran sits on the north, giving it easy access to tankers entering and leaving the Strait.
Very few think Iran would actually try to close the Strait, though it might take steps to slow the traffic. Too many countries depend on the oil that passes through it, and Iran needs allies, not more enemies.
However, just the threat used to cause an economic shock and rising oil prices in most developed economies. For example, the last time Iran threatened to close the Strait average gasoline prices topped out at nearly $4.00 a gallon in early 2012.
That hasn’t happened this time. While U.S. average gasoline prices are up 50 cents or 60 cents a gallon for the year, they’re still well under $3.00 a gallon in most places (except California).
Part of that rise is a result of Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC) cutting back oil production in an effort to increase the price of oil. In addition, U.S. refineries are shifting to their “summer blend” of gasoline, which slows production and costs more, putting upward pressure on prices.
Even President Trump’s decision in April to end the temporary sanctions relief on Iran’s oil exports seems to have had a minimal impact.
Iran had been producing about 3.8 million barrels of crude oil per day last summer. Production began to decline in the fall and today is only about 2.5 million bbl/d.
Yet, gasoline prices are remarkably low given all of the turmoil—and they may go lower in the near future. Oil prices have dropped recently, due to swelling inventories and fears a trade war would slow economic growth.
It would be hard to overstate what a remarkable reversal this is from the past four decades, when United States foreign policymakers had to weigh many of their decisions on how Middle Eastern countries would react—not to mention how the administration’s domestic critics would react.
Recall how many people accused President George H.W. Bush’s decision to go to the aid of Kuwait against Iraq in the Gulf War as one motivated by the U.S. need for Middle Eastern oil. Or how the U.S. government’s support for the Shah of Iran in the decades leading up to the 1979 revolution was based on the need for Iranian oil.
Those criticisms may have been overstated—there were a number of other important factors—but it highlights the issue that U.S. foreign policy, or at least the perception of it, has long been driven by the country’s need of oil.
And while the U.S. still net imports 2.34 million barrels of petroleum a day, only 1.53 million bbl/d comes from Persian Gulf countries, according to the Energy Information Administration. In a pinch, U.S. producers and other countries could make up most of that difference if needed.
All of this was made possible by the dramatic growth in U.S. crude oil and natural gas production over the past decade—a direct result of the fracking boom.
That production explosion has made the U.S. the dominant player in the energy market place. It doesn’t necessarily mean the U.S. won’t get involved in Middle Eastern conflicts, but it does mean that the U.S. need for oil likely won’t be the driving factor.