On Tuesday, May 8, President Donald Trump announced America’s withdrawal from the “Iran Deal”— formally known as the Joint Comprehensive Plan of Action (JCPOA)—established by the Obama administration in 2015. While this decision has received mixed reactions, its impact stretches beyond politics and into the economic state of the oil and gas industry. Expecting sanctions on the import of Iran oil, consumers are understandably worried about rising gas prices. But how will this affect the U.S. oil and gas industry?
Currently, the U.S. is the largest importer of crude oil. But they’re also the second largest exporter (and on track to be No 1.). With recent advancements in U.S. oil extraction, especially fracking, the Energy Information Administration estimates domestic crude oil production to increase over the next five years and then generally flatten after 2022, through 2050. Part of their reason for increasing oil output? Providing stability to the market.
One example of this is Venezuela. They’ve been a top oil exporter in the past decade. However, political instability and infrastructure issues have decreased their output from 2.1 million barrels per day (B/D) to 1.6 million. To put that number into perspective, the U.S. increased its production by 1.27 million B/D this year. And that number is only growing.
What does this have to do with the Iran Deal?
A portion of the deal signed by the Obama administration was a suspension of sanctions. This allowed Iran to sell oil to the U.S. and its trade allies. With the deal ended, sanctions are likely to resurface.
How much does Iran currently export to the U.S.?
Since the founding of the Iran Deal, crude imports from Persian Gulf countries, which includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates dropped from an average of 52.5 million barrels to 39.7 million barrels per month.
What will the sanctions look like?
We can’t be sure until sanctions are defined by the U.S. government, but prior sanctions only limited Iran by 20 percent of their original export, between 400,000 and 500,000 B/D. What’s more, European trade allies are likely to split on the issue, ensuring oil from Iran remains in some pockets of the market. Even if they don’t, Iran can cover that 400,000 – 500,000 B/D impact by selling to Russia and China.
To be clear, the end of this deal doesn’t mean another deal can’t be made between the U.S. and Iran. Sanctions seem likely, but no restrictions are guaranteed. Regardless, the situation will create upward pressure on prices, but only by a few dollars a barrel. Russia, Saudi Arabia and other nations are also likely to offload excess barrels for the payout in the near future. A short-term crunch is likely to be followed by a price drop. The EIA predicts that prices at the pump will hit a peak at $2.97 a gallon in June before dropping in the fall.
How will this impact the U.S. oil and gas industry?
The top three players—Russia, Saudi Arabia and the U.S.—are looking to take the market, creating buy networks to benefit from rising prices. The withdrawal from the Iran deal will result in market tightening, an encouragement for the U.S. to compensate for a shortage. According to a recent Forbes article, Kuwait, Saudi Arabia and the U.S. are ready to replace the gap that sanctions might create. In the past year, the U.S. has grown from 400 rigs to over 825 in the last week of April. The industry is experiencing a boom, and this will only boost production.
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