
Iran’s parliament has voted unanimously to close the Strait of Hormuz, a choke point in the Persian Gulf through which more than a quarter of seaborne traded oil and around one-fifth of the global LNG trade passed in 2023. Of the crude oil that passes through the strait, about 83% went to Asian countries, with the top destinations including China, India, Japan, and South Korea. Since 2018, oil exports from the Persian Gulf to the United States have collapsed in light of new production in the U.S. shale basins.
Increased U.S. production and America’s decreased consumption of Persian Gulf oil make it less likely that an attempt by Iran to close the Strait of Hormuz would successfully hurt the United States enough to force a policy change. Spencer Jakab writes in The Wall Street Journal:
Back in 1977, in the run up to the Iranian Revolution that sparked the second Oil Crisis, the U.S. had net imports of about 3.1 billion barrels of petroleum a year and refined products or 14 barrels per person. That per capita number was unchanged as recently as 2003 at the time of the Second Gulf War. The U.S. also was a significant importer of natural gas in both of those years.
Today, because of hydraulic fracturing, the U.S. has net exports of about 2.5 barrels per capita and is the world’s largest seller of liquefied natural gas. The technology isn’t new, but improvements in the past 15 years have been transformational.
The other thing about fracking that makes the U.S., and by extension the world, more resilient to any steps Iran could take to choke off the supply of oil and gas is its unique economics. An old saying among commodity traders is that “it takes high prices to cure high prices.”
Prices for Brent crude oil are up today, but not egregiously so.
The number of horizontal oil and gas drilling rigs used in the shale basins in operation today is only 502, down from a peak of 1,372 in 2014. With prices for oil fairly low and the technology of horizontal drilling advancing, plenty of oil has been flowing from the shale basins without as much drilling as in 2014. But the rig capacity is available to increase drilling operations in the face of any oil shock. And higher prices will make areas of the shale basins that are currently uneconomical to drill profitable once again.
Action Line: Will there be an oil shock? No one can say for sure. But the likelihood that an oil shock the likes of which Americans saw in the 1970s is mitigated by domestic production and an energy landscape that is different than what existed then. When you want to talk about oil shocks and your portfolio, email me at ejsmith@yoursurvivalguy.com. Click here to subscribe to my free monthly Survive & Thrive letter.