The US military droned Iranian bad guy Soleimani on January 3, and what was the world oil market’s reaction? Meh. Granted, the near-term future price rose about $2/barrel from about $61 to just over $63, a 3+% jump that is not insignificant. But this was a major military action by the largest world oil producer against another large oil producer, and all we have is a 3% jump in prices? As I said, Meh. In prior years and prior decades, a similar military action could have moved world oil prices ten times that. For instance, when Iraq invaded Kuwait in 1990, the spot price rose from $21 to $28, a 33% jump, before ultimately reaching $40. Then, when the US invaded Iraq and it soon became evident that Operation Desert Storm would be a smashing success, prices dropped to $20/barrel, a 50% change. (See this article for backup). So, why the ho-hum reaction to the US’s takeout of Soleimani?
The Emergence of US Production
The most significant reason is the huge increase in US oil production such that the US is now the leading daily oil producer in the world. There is a greater abundance of oil available in world markets than there was 30 years ago because US producers have ramped up due to technological advances such as hydraulic fracturing. According to the Energy Information Administration, in 2019, the US was the leading producer with almost $18 million barrels per day or 18% of world production, far ahead of #2 Saudi Arabia which had 12% of daily world production. Thank US frackers for keeping world oil prices relatively steady despite heightened geopolitical tensions.
The Information Economy
Secondly, as the tech sector has grown, the importance of oil has shrunk in that the percentage of the US and the world economy that is dependent on stable oil prices have declined. The price of your new iPhone or your new Lululemon outfit is not a huge function of the price of oil or where the oil is coming from. Granted, we still drive cars that burn gasoline, and oil is a part of chemicals and plastics that are part of new-age products. However, oil is not nearly as central to the US economy as it was when the Iraq/Kuwait situation developed during the Bush I presidency.
Lastly, at least for this posting, we have developed alternatives to oil on a massive scale. Electric cars are nice, but the power source that is charging electric cars is likely natural gas or perhaps even solar. Nearly all of the natural gas consumed here in the US was produced here in the US (or perhaps in Canada or Mexico). Crude Oil is not a major factor in US domestic energy production and is less of a factor now than it was 30 years ago.
If you are looking at heightened tensions and perhaps war (of some scale) between the US and Iran as an opportunity to go long on oil futures and make a big killing in the process, think again. Oil may go up or at least not go down as long as the US and Iran are at loggerheads, but oil prices could drop quickly if there is a perceived easing or lull in the tensions. The world of oil has changed a great deal in the past 30 years.