Escalating rhetoric between Iran and President Trump’s administration has threatened to lead to outright conflict in the Persian Gulf. But a much more realistic danger is actually spiking oil prices. In fact, if the United States was not producing a record 11 million barrels of oil per day, we might be seeing dramatic increases in oil prices.
In a speech on July 21, Iranian leader Ayatollah Ali Khamenei said, “If Iran’s oil is not to be exported, oil of no country in the region will be exported.” This was taken by the global oil industry as a threat that Iran would block off access to the Persian Gulf at the Strait of Hormuz, blocking up to as much as 30 percent of the world’s seaborne oil shipments.
Four days later, Saudi Arabia announced it would suspend shipments of oil and petroleum products through the Bab al-Mandab Strait at the mouth of the Red Sea. Saudi Arabia was reacting to an attack on one of its tankers by Houthi rebels from Yemen who are widely considered proxies of the Iranian regime.
The next day, in a message to President Trump, Iranian Maj. Gen. Qassem Soleimani threatened the United States with terrorist attacks. He said, “You know that this war will destroy all that you possess. …You know our power in the region and our capabilities in asymmetric war.”
These are the types of actions, threats and ramblings that unnerve oil traders and make markets anxious even though none of this represents a true threat to the global oil supply. Iran is incapable of blocking oil shipments through the Strait of Hormuz. The Iranians tried this tactic in 2011, but the world quickly responded with enough military might to end Iranian delusions of power.
Similarly, the world would not permit Iranian-backed Houthis to block or seriously threaten safe passage through the narrow passage into the Red Sea that leads to the vital Suez Canal and the Mediterranean Sea.
Although Iran and its proxies are accomplished terrorists, their asymmetrical warfare presents little actual threat to the global consumption of almost 100 million barrels of oil per day. There are real terrorist threats to the oil market —terrorist activity in Libya and Nigeria has taken out oil production and transportation in both of those countries over the past year — but Iranian backed terrorist organizations were not associated with the outages in those countries.
The threats and escalations coming out of Iran are really best described as rhetoric and harassment. However, rhetoric and harassment — and even just rumor and fear — are enough to rile markets and can cause oil prices to spike. Speculators act on news reports, and bad news and threats of war make the headlines. Traders react to what other traders are doing, and markets can jump when the news becomes dominated by talk of impending conflict.
There is no real risk of an actual oil shortage so none of what is happening with regards to Iran should scare the oil market, but it can and does. Oil prices have briefly spiked as much as $1 or more per barrel in response to verbal sparring. It is the power of our domestic oil production that has kept the oil markets relatively stable through geopolitical hype over the last month.
This is why we need a robust oil industry. When even rhetoric and headlines can scare the market, we must be confident in our ability to overcome global oil supply issues to make up for global losses and meet our own needs and our allies’ needs through domestic production and the oil production and transportation networks of our allies.
This month, for the first time, the Department of Energy said that the United States was producing 11 million barrels of oil per day. This should be a point of pride, because it is what allows the U.S. to withstand the geopolitical flareups and continue on our path of economic growth.