When President Trump pulled out of the Iran nuclear deal, analysts warned that Irans crude oil production and exports could decline, forcing crude oil prices up. Call it turm-oil in the energy markets.
For example, Time magazine quotes PIMCO Executive Vice President Greg Sharenow: The consumers are going to shoulder the bill. The U.S. economy will face headwinds from prices that will come as a natural result of this.
Maybe, but likely only in the short term.
While it remains to be seen whether this shortage will materialize, one thing remains clear: The recent U.S. gas and oil boom will help fill any impending gaps in the global energy supply.
Thanks to hydraulic fracturing, U.S. crude oil production should grow to help meet or exceed demand over the long term, which means prices will likely stabilize at a reasonably affordable price.
President Obama imposed economic sanctions on Iran in 2012, and it had a major impact on Irans ability to produce and export oil.
According to the Federal Reserve Bank of St. Louis, Iran was exporting about 2.6 million barrels of crude oil per day in 2011. By 2014 that number was down to just over 1 million.
The Iranian nuclear agreement in 2015 relaxed many of those sanctions, and Iran began to increase its crude oil exports to 1.5 million barrels per day. Today its just over 2.3 million.
Thus, if the reimposed U.S. sanctions apply to Iranian oil production — an issue that is as yet undecided — daily global production could decline by 1 million barrels or more.
The good news is that the United States has the resources and the ability to fill the gap, and rising crude oil prices could serve as the catalyst to do so.
According to the U.S. Energy Information Administration (EIA), The United States remained the worlds top producer of petroleum and natural gas hydrocarbons in 2017, reaching a record high. Since 2008, U.S. petroleum and natural gas production has increased by nearly 60 percent.
The EIA points out that U.S. crude oil production has increased nearly every year, leveling off only in 2016 when the price of crude declined to less than $30 per barrel. Saudi Arabia and Russian production have remained roughly the same for a decade.
The EIA goes on to say, U.S. petroleum production increased by 745,000 barrels per day (b/d) in 2017, driven by a 21 percent increase in oil prices to approximately $65 per barrel. If U.S. producers, lured by oil at around $70 per barrel, were to continue at that rate of increase, the U.S. would compensate for the Iranian oil cutback in two years.
Crude oil is a commodity. And like most commodities, its price will fluctuate, sometimes wildly. But high oil prices and low U.S. production costs mean Iranian oil production decline can be replaced in the near future.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas.
