Oil Check: Iranian Oil and Potential Middle East Conflict

Iranian Oil Production Projected to Plummet as Middle East Tensions Rise

The days of under three dollar gas may soon be gone. In a previous Oil Check, we mentioned the likelihood that the United States would end waivers allowing countries to import Iranian oil, raising crude oil prices and allowing OPEC to increase their own production without fear of over-saturating the market. Well, the wheels are in motion.

U.S. Expires Iran Waivers

Crude oil prices have increased significantly since Mid-April as others see the writing on the wall suggesting the U.S. will cut off Iranian oil exports and increase demand. Iran exports a total of 1.1 million barrels a day. Whether the current administration will succeed in impacting Iran’s production by more than half is a topic of debate. But OPEC’s heavy hitters, Saudi Arabia and the UAE could make up the difference by boosting their production by as much as 1.4-1.5 million barrels a day if something were to happen.

What is happening with Iran?

After the recent attacks on oil tankers in the Persian Gulf, three of which belonged to OPEC’s top two producers, tensions in the area remain high. Saudi Arabia and the UAE are not on good terms with Iran, and the current White House has undone much of the progress the previous administration made in deescalating their issues. The U.S. has gone as far as to suggest Iran is pushing conflict through militant groups in the Middle East in response to their sanctions, but has not shared any evidence to support this accusation.

A Morbid Hypothetical

In a state of war, Iran is cut off from oil exports. Can Saudi Arabia make up for the sudden lack of supply?

The short answer is yes. But, for the sake of hypotheticals, let’s run the numbers. Other OPEC members, Venezuela, Libya, and Algeria are already in states of prolonged, if not permanent political disruption. If they get any worse, we estimate 1.35 million barrels per day (bpd) production loss as a result. Add the Iranian production cut and we’re looking at 2.65 million bpd total loss.

We know that Saudi Arabia has already reduced their production by 1.3 million since the November oil market oversupply. Russia also cut their production, but by less than a quarter of that between October and March. The IEA reported that OPEC’s spare capacity easily covers these losses, capable of reaching 3.3 million bpd. The output, 2.2 million from Saudi Arabia and 1.1 million from Kuwait, doesn’t even account for Russia seizing the opportunity to increase its oil market shares.

But how badly does Saudi Arabia want to increase production?

Another short answer: not very. Once again, Saudi Arabia has the opportunity to achieve their goal of $90 per barrel (petroleum sector revenue makes up 80% of the country’s budget). With this in mind, they have every reason to increase production slowly. If they do it at all. This could have come at a better time, as residents of the U.S. are projected to have an impressively road-heavy summer.

Record-Breaking Road Travel

In late April, the U.S. Energy Information Administration (EIA), forecasted U.S. motor gasoline consumption at a record-breaking scale. The EIA also anticipates the U.S. will export more gasoline than it imports come this summer. Not only would it be the first time the U.S. has been a net exporter of oil since the 60’s, it also lets the rest of the world know they can deliver low-cost gasoline. What’s more, increasing exports in oil helps reduce the U.S. trade deficit.

What does this mean for you?

Get ready to pay more at the pump. While it’s unlikely that Iranian oil exports will be completely cut off, production will drop. With Saudi Arabia more interested in raising the per barrel price and U.S. gas consumption hitting a new high, you might want to give that electric vehicle you were eyeing another look. Interested in reading more? Check out our Summer Fuel Trends Report.

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