After news broke of a U.S.-Israeli strike on the Islamic Republic of Iran, for many people the first question wasn’t about military strategy — it was about the price of gasoline. Indeed, oil futures surged after the strikes, but situations such as these provide a valuable lesson about the importance of energy abundance.
Energy markets are resilient when supplies are plentiful and diversified across many sources. When energy production is constrained, whether by policy choices, investment uncertainty, or infrastructure limitations, geopolitical shocks translate quickly into higher prices.
This is hardly the first time that conflict and instability have broken out in an energy-rich region of the world. Earlier this month in Budapest, I discussed how this same dynamic played out when Russia’s invasion of Ukraine disrupted the supply of Russian oil and gas.
EUROPEAN LEADERS UNITED IN OPPOSING US EASING SANCTIONS ON RUSSIAN OIL
Iran sits at a strategic chokepoint, the Strait of Hormuz, where roughly 20% of globally traded oil passes through. Any military escalation involving Iran raises the possibility that Iran could shut down the strait, constraining the flow of oil to global markets.
Energy markets respond not only to actual supply disruptions but also to the risk of disruption. Even the possibility of instability can send prices higher as traders incorporate geopolitical risk into market expectations.
The immediate price reaction to the situation in Iran has attracted headlines, but the dramatic growth in U.S. energy production over the past decade has played a stabilizing role.
American oil output has more than doubled since 2008, due to the shale revolution, which dramatically expanded global supply and reshaped world energy markets. Thanks to domestic production, Americans are much less vulnerable to instability in the Middle East than they were in 2008 when oil prices skyrocketed to $147 per barrel during the 2000s energy crisis. Adjusted for inflation, the $147-per-barrel price of oil in 2008 would have cost $222 today. In contrast, when the Iran conflict first broke out, oil prices briefly spiked to $116 per barrel, and are today hovering around $90.
U.S. Energy Secretary Chris Wright recently noted that the world is “very well supplied with oil” and described the current surge as a “temporary period of elevated energy prices.”
Abundant supply is doing exactly what it should — limiting the economic fallout of geopolitical shocks.
Recent years have demonstrated this dynamic repeatedly. When global spare capacity is limited, even relatively modest disruptions can produce outsized price movements. On the other hand, when supply growth is robust, markets are better able to absorb shocks without dramatic price spikes.
Stable energy prices matter greatly to American families. When energy prices surge, the effects ripple through nearly every sector of the economy — from transportation and manufacturing to food production and consumer goods. Affordable energy underpins economic growth, industrial competitiveness, and household well-being.
The Iran war should remind policymakers why robust energy production is so critical, but in recent years, many governments have moved in the opposite direction.
Countries across Europe have pursued aggressive decarbonization strategies aimed at rapidly reducing fossil fuel use. These efforts seek to address climate risks, but they’ve also limited the supply of energy. This means that geopolitical crises will inevitably hit their citizens harder.
In contrast, U.S. policymakers have emphasized “energy dominance,” seeking an abundant supply of traditional energy sources, including oil and natural gas. Expanding domestic production made the U.S. less vulnerable to geopolitical chokepoints and weakened the influence of hostile regimes.
Whenever a crisis occurs — whether in the Middle East, Eastern Europe, or elsewhere — energy markets transmit the immediate economic effects. The Iran war again demonstrated how vulnerable the global economy can be when a large share of oil and natural gas is cut off overnight. It’s basic economics: when supply goes down and demand remains stable, prices rise and anxiety sets in.
DOMESTIC ENERGY DOMINANCE MAKES US SAFER
Eliminating uncertainty in today’s changing world is impossible. But building energy systems capable of absorbing periodic shocks is entirely feasible. Abundant supply, diversified production, and resilient infrastructure allow markets to adjust when disruptions occur. When energy markets are deep and flexible, even major geopolitical events become manageable economic disturbances rather than systemic crises.
The lesson of the current crisis is simple: when energy is scarce, geopolitics drives prices. When energy is abundant, markets absorb shocks — and families feel the difference. U.S. energy policy should have one goal: energy abundance — from oil and gas to nuclear and wind, sans subsidies and mandates.
Dr. Kevin Dayaratna, Ph.D., is the vice president of the Center for Statistical Modelling and Scientific Analysis at Advancing American Freedom.