For many older Americans the thought of war in the Middle East will trigger memories of soaring gas prices and long lines at the pumps. But as US relations with Iran sink to a new low there is, as yet, no sign of panic.
US crude oil prices shot higher following the killing of Iran’s top military commander, Qassem Suleimani, by the US last week, but the gains are modest relative to the risk of further escalation of tensions between the US and Iran.
West Texas Intermediate crude-oil prices rose 6% to $64.72 a barrel following news US air forces assassinated Suleimani, commander of the Islamic Revolutionary Guard Corps’ Quds Force.
That 6% rise is tiny compared with the swings seen in years past, largely because of the fracking revolution. Over the last decade fracking has allowed the US to squeeze oil and gas from shale and transformed the country into the largest producer of both.
“If we had the same skirmishing between the US and Iran happening 20 years ago or even 10 years ago, I think the impact on the oil markets would have been a lot bigger, because the shale revolution hadn’t happened yet,” said Stewart Glickman, energy analyst at CFRA Research.
The shale-oil boom made the US largely a self-sufficient energy producer. In October, US producers pumped nearly 12.7m barrels a day of crude oil, a record, according to the latest data from the Energy Information Administration, the statistical arm of the US energy department. In September, the US exported more crude oil and petroleum products than it imported, the first month this has happened since the EIA began monthly record-keeping in 1973.
That’s given the US more geopolitical leverage on oil, said Brian Kessens, managing director and portfolio manager at Tortoise, an energy investment firm. Twenty years ago, the US imported 2.4m barrels of crude oil daily from the Gulf, whereas today it imports only about 700,000 barrels daily, mostly used by east coast refiners, Glickman said, citing EIA October data.
That has sheltered the US economy and consumer from the oil-price shocks common in the 1970s and 1980s. But being sheltered doesn’t mean immunity. Oil is the most important global commodity, so US and global prices influence each other, energy-market watchers say. And the US still needs a certain type of crude oil not available here to make some of its domestic refineries run, so the US can’t completely go it alone.
The US and the world are also less reliant on Iranian oil than in the past. Not only did the Trump administration reinstate sanctions on Iran when the US pulled out of the international nuclear deal, keeping Iranian crude off the market, but other non-Opec producers are ready to fill the supply gap. Although Iran is the seventh-largest global producer and the fourth-largest Opec producer, Canada, Brazil and Russia are all big producers of oil, in addition to the US, which now is the world’s top producer.
Price spikes related to geopolitics can be short-lived. In September, oil prices jumped after Iran bombed a key Saudi Arabian oil refinery. However, that was quickly repaired and prices reverted back to previous levels. How Iran responds to the US attack will determine oil-price direction, said Rob Haworth, senior investment strategist at US Bank Wealth Management. There are reports of Iranian cybersecurity attacks, but so far no reports of impacts on oil production. That’s one reason why oil prices retreated from Monday’s high, now trading at $62.76.
“The key is, how is output actually changed in the long run,” Haworth said.
Unless there’s a sustained price rise, any impact on consumers should be fleeting, said Amanda Agati, chief investment strategist at PNC Financial Services Group. Even if US crude oil prices rise to $70 a barrel, consumers are in good shape to weather the uptick as their finances are strong, the US economy is growing and unemployment is low.
“It’s not ideal, but it’s manageable,” she said.
So far gasoline prices haven’t changed much following the air strikes, with AAA saying the current nationwide average price for a gallon of regular gas is $2.85, the same as a week and a month ago. It takes some movement in crude-oil prices to affect gasoline values. A $10-a-barrel price rise in oil increases gasoline prices by 24 cents a gallon, if the cost is fully passed through, Glickman said, citing IHS Markit data.
Consumer spending on gasoline may start to slow if pump prices sustain at $3 a gallon or higher, Kessens said, which roughly translates to $80 crude. There are ways the US can temporarily manage gas prices, such as tapping the Strategic Petroleum Reserve. Sustained prices above $80 could also encourage more shale-oil production or from Opec or non-Opec members like Russia, eventually weighing on prices.
Higher prices are good for US shale producers, and energy was the worst-performing equity sector in 2019, Agati said. Shale producers are making some money, with internal rates of return around $40 a barrel, Glickman said. However, they are still dealing with the wreckage caused by 2015’s oil glut. Glickman and other sources said investors want companies to focus on cashflow, not growth.
“There’s a huge incentive for companies not to do anything. But at some point, if prices go up enough, they may get tempted [to drill],” he said.
The US economy is still dependent on oil and the longer the situation with Iran persists and the worse it gets, the more likely it is to hurt the US. Could the US completely wean itself off foreign oil? Maybe over the long term, but in the short term no. Kessens said the US refining system was built to process lower-quality crude oil, now mostly imported from Canada and Mexico. “It would take some time for the US to reconfigure the system to fully utilize the higher-quality crude from shale oil. It’s possible, but it wouldn’t happen day one,” he said.
