Global oil markets are clearly signaling that Iran no longer holds the global economy hostage to its aggression. Iran can no longer blackmail the free world with threats of withholding oil from the market. The global economy is well supplied with oil.
Iran produces about 3.5 million barrels of oil a day and exports just under 2 million barrels a day. The world economy uses about 103 million barrels a day. Iran’s oil exports make up less than 2% of daily global demand. Global supply is about 108-109 million barrels a day. That estimate includes excess available supply of between 5-6 million barrels a day. Saudi Arabia alone could increase its daily oil supply by up to 3 million barrels a day.
Importantly, the U.S. Strategic Petroleum Reserve holds about 380 million barrels, even after President Joe Biden’s imprudent draining of the SPR for purely partisan political purposes. In an oil crisis, Biden could, and almost certainly would, order the release of up to 4 million barrels a day. That available supply from the SPR is not included in the estimate of daily excess oil supply. Including the SPR, the daily excess supply approaches 9 million barrels a day.
As a result, Iranian threats against the global economy are pure bluster. The OPEC oil embargo against the United States is ancient history. Today, the U.S. is the world’s leading producer of oil. In fact, it has been the world leader for 6 consecutive years. Moreover, the U.S. economy’s largest exports are oil and related products. The shale oil revolution transformed the global oil market. Capitalism and American entrepreneurism broke the stranglehold that OPEC, including Iran, held over not only the U.S. economy but also the world economy. In 2010, the U.S. produced just 6 million barrels a day. Now, U.S. oil and equivalents production exceeds 21 million barrels a day, and daily production can ramp up in as short a period as 2-3 weeks.
That is the time it takes to drill a new well in the oil-prolific Permian Basin, which holds up to 50 billion barrels of recoverable reserves. When Iran launched its latest missile attack against Israel, the price of West Texas Intermediate oil, the U.S. benchmark, increased by about 10%, or $7 per barrel, to $78.
However, as each day passes, the oil market more accurately assesses risk. Even if Israel were to reduce Iran’s oil sector to rubble, the world economy would be well supplied with oil. Today, the price of WTI is falling toward $70 dollars a barrel.
The one risk that oil markets may have discounted is the threat that Iran would try to block oil from being shipped through the Strait of Hormuz, a 30-mile-wide choke point through which Saudi Arabia, Kuwait, and Iraq export oil. However, if Iran mines the Strait or uses small, fast boats to attack oil tankers, then there is a strong probability that the U.S. will join Israel in attacking Iran and keeping the Strait open.
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The presidential and congressional elections would compel Biden to take action. He would not be able to appease and prevaricate. People would demand action. Americans, after all, hate high gasoline prices.
Fifty years ago, OPEC and Iran controlled the price of oil. Today, the global price of oil is a matter of supply and demand, with the U.S. being the largest supplier. Capitalism is winning again.