Two decades ago, the industrialized world would have shuddered at the image of oil tankers burning near the Persian Gulf.
Oil prices would have spiked by double digits, sending prices at the gas pump soaring. Talk of inflation and recession would have been on everyone’s lips. Politicians would be railing about energy independence and the United States being captive to Saudi sheikhs. Consumers would conjure up images of gas lines. The country might descend into a funk.
As of Friday, with photos of oil tankers burning after they were attacked near the Strait of Hormuz dominating front pages, oil prices are far lower than they were two months ago. Benchmark Brent crude has dropped nearly 20 percent since its April highs in the mid-$70s-per-barrel range. Brent was $62 per barrel late Friday afternoon, dampening shares in energy companies.
Gas prices at the pump have dropped three cents since Monday, continuing a downward trend over the past several weeks, according to AAA. The national average for a gallon of regular unleaded was $2.70 on Friday.
“It’s totally weird,” said Bill Selesky of Argus Research. “The attacks are a big deal. People may be brushing them off because they think some type of diplomatic solution would solve the problem.”
The United States is in a far different place, energy-wise, than it was a decade ago.
“If this were 2000 or even 2010, those headlines out of the Persian Gulf would be the precursor to a full-blown energy crisis,” said John Kilduff of Again Capital. “Back then, we were highly dependent on those barrels coming through the Strait of Hormuz. Now, you could argue that the U.S. is nearly energy independent.”
For one thing, the country is producing twice the amount of oil it was in 2010, thanks to technology. The latest reports show 12.4 million barrels per day, about twice the 6 million barrels the country was producing a decade ago. The United States is even exporting petroleum products and natural gas, which was unthinkable a few years ago.
For example, U.S. shale oil production has reduced the U.S. demand for Persian Gulf oil from 3 million barrels a day in 2003 to 1 million barrels now.
Production is only half the story. Consumers across industrialized nations are much more energy-conscious. More-efficient automobiles, including hybrids; a robust digital economy; and a growing renewable-energy sector have combined to make the United States and other nations far less vulnerable to oil shortages.
That and the trade war between the United States and China have quashed oil demand so much that even with major producers like Iran, Venezuela, Nigeria and Libya diminished, the world has more oil than it can consume.
“The demand is still there, but demand growth is slowing due to the impact on key Asian and German manufacturing centers,” Kilduff said. “The cause is the fallout from the U.S.-China trade war.”
“We’ve just gone from shortage to glut,” said Frank Verrastro of the Center for Strategic and International Studies. “The market has totally reversed from a decade ago. There are more suppliers from different sources, including alternatives.”
The Organization of the Petroleum Exporting Countries has tried to reduce supply to keep oil prices high enough to support its members’ economies, but it has largely been unsuccessful.
Oil and pump prices were rising just two months ago, with gasoline jumping five cents in a five-day span in April. But since then, U.S. inventories of oil and gasoline have exploded because of increased refinery activity and a rebound of imports into the country.
Make no mistake, a hard stop to the 20 million or so barrels of oil shipped through the Strait of Hormuz — about 20 percent of global consumption — would have huge negative consequences for the world’s economy.
“At that point, you would see a slowdown, price spikes and military intervention because the world would slow if you take 20 percent of oil supply off the grid,” Verrastro said.
In that event, Verrastro foresees an international coalition, including China and Japan, interceding in the Persian Gulf region to secure the vast amounts of petroleum and natural gas that are vital to their survival.
“They would lose their supply of natural gas from Qatar and their oil from Saudi Arabia and from Iran,” Verrastro said. They can’t live without that.