High Oil Prices Don’t Constitute An Emergency

Saudi Arabia claims spare oil production capacity, but those claims may be tested as sanctions start to impact Iran’s oil exports.

As U.S. sanctions on Iran have forced some countries to stop importing oil from Iran, crude oil prices have inevitably risen. The U.S. started down this path earlier this year when President Trump announced the withdrawal from the Obama-era Iran nuclear agreement.

Some sanctions went into effect in August, but the sanctions with potentially the most significant global implications go into effect in November, when the sanctions target Iran’s oil exports.

In May of this year, Iran exported 2.7 million barrels of oil per day, which accounted for nearly 3% of the world’s daily crude oil consumption. The new sanctions are expected to impact about 1.5 million BPD of Iran’s exports.

Under pressure from the U.S., many countries have begun to reduce oil exports from Iran. As the market has slowly absorbed the implications of this loss, crude oil prices have steadily risen. As recently as August, a barrel of Brent crude oil was still in the upper $60s. Today, the price has risen to $83/bbl — a four-year high. West Texas Intermediate is now over $73/bbl.

This was entirely predictable. The world simply does not currently have a lot of spare crude oil capacity. But there is a widespread belief that the Organization of the Petroleum Exporting Countries (OPEC) has excess capacity that can be used to offset the loss of Iranian oil.

In fact, President Trump has tweeted his ire at OPEC on several occasions, most recently on September 20th when he wrote:

We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!

Saudi Arabia claims about 1.5 million BPD of spare capacity but that would take their production to an all-time high. A number of people have asked if I believe their claim. Yes, I think they do have some excess capacity, but the bulk of that is reserved for true emergencies. High oil prices do not constitute an emergency.